Monetary-Exchange Rate Policy and Current Account Dynamics

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Monetary-Exchange Rate Policy and Current Account Dynamics

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Malik, Hamza

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Hamza Ali Malik

Abstract

A dynamic stochastic general equilibrium monetary model with incomplete and imperfect asset markets, monopolistic competition and staggered nominal price rigidities is developed to shed light on the role of exchange rate and its relation with current account dynamics in the formulation of monetary-exchange rate policies. The paper shows that because of incomplete risk sharing, due to incomplete asset markets, the dynamic relationship between real exchange rate and net foreign assets affect the behaviour of domestic inflation and aggregate output. This, in turn, implies that the optimal monetary policy entail a response to net foreign asset position or the real exchange rate gap defined as the difference between actual real exchange rate and the value that would prevail with flexible prices and complete asset markets. In comparing the performance of alternative monetary-exchange rate policy rules, an interesting and fairly robust result that stands out is that ‘dirty floating’ out-performs flexible exchange rate regime with domestic inflation targeting.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 455.

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Date of creation: Aug 2005
Date of revision: Sep 2006
Handle: RePEc:pra:mprapa:455

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-12-04 (All new papers)
NEP-CBA-2006-12-04 (Central Banking)
NEP-DGE-2006-12-04 (Dynamic General Equilibrium)
NEP-IFN-2006-12-04 (International Finance)
NEP-MAC-2006-12-04 (Macroeconomics)
NEP-MON-2006-12-04 (Monetary Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Jenkinson, Tim & Mayer, Colin, 1992. "The Assessment: Corporate Governance and Corporate Control," Oxford Review of Economic Policy, Oxford University Press, vol. 8(3), pages 1-10, Autumn.
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Other versions:
- Richard N. Langlois & Nicolai J. Foss, 1996. "Capabilities and Governance the Rebirth of Production in the Theory of Economic Organization," Working papers 1996-02, University of Connecticut, Department of Economics. [Downloadable!]
- Langlois, Richard N & Foss, Nicolai J, 1999. "Capabilities and Governance: The Rebirth of Production in the Theory of Economic Organization," Kyklos, Blackwell Publishing, vol. 52(2), pages 201-18.
Steven Klepper & Kenneth L. Simons, 2000. "The Making of an Oligopoly: Firm Survival and Technological Change in the Evolution of the U.S. Tire Industry," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 728-760, August. [Downloadable!] (restricted)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Plasmans J. & Fornero J. & Michalak T., 2006. "A microfounded sectoral model for open economies," Working Papers 2007013, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
Other versions:
- Plasmans, J.E.J. & Fornero, J. & Michalak, T., 2007. "A Microfounded Sectoral Model for Open Economies," Discussion Paper 2007-39, Tilburg University, Center for Economic Research. [Downloadable!]
- Joseph Plasmans & Jorge Fornero & Tomasz Michalak, 2007. "A Microfounded Sectoral Model for Open Economies," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]

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