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Current Account And Exchange Rate Dynamics

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Author Info
LILIA CAVALLARI

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Abstract

In the theoretical part of the paper, we analyze the positive and normative e¤ects of a surprise monetary expansion in a small open economy characterized by imperfect competition and short-run price rigidity in the domestic sector. The temporary output boom fostered by the monetary expansion is shown to come at the cost of a permanent squeeze of the domestic sector. In general this a¤ects welfare ambigously, since the welfare gain from the monetary expansion reduces as net foreign assets become smaller and eventually turns negative if the economy accumulates too large a debt towards the rest of the world. The empirical part of the paper provides evidence in favour of a crucial role of monetary shocks in current account ‡uctuations. This holds especially for the more open economies in the G7, namely the European countries and Canada.

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File URL: http://dep.eco.uniroma1.it/docs/working_papers/Wp38.pdf
File Format: application/pdf
File Function: 1999
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Publisher Info
Paper provided by Sapienza University of Rome, Department of Public Economics in its series Working Papers with number 38.

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Length: 37 pages
Date of creation: Nov 1999
Date of revision:
Handle: RePEc:sap:wpaper:38

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Related research
Keywords: small open economy; current account; monetary transmission mechanism; structural VAR.;

Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

References listed on IDEAS
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  1. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February. [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.)

  1. Massimo Giuliodori, . "The Empirical Relevance of a basic sticky-price intertemporal model," Working Papers 2001_17, Department of Economics, University of Glasgow. [Downloadable!]
  2. Thomas Lubik, 2003. "Industrial Structure and Monetary Policy in a Small Open Economy," Economics Working Paper Archive 493, The Johns Hopkins University,Department of Economics. [Downloadable!]
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This page was last updated on 2009-12-20.

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