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Current-account effects of a devaluation in an optimizing model with capital accumulation


  • Nielsen, Soren Bo


This article explores the consequences of a devaluation in the context of a ‘real’, optimizing model of a small open economy. What provides for real effects of the devaluation is the existence of nominal wage stickiness during a contract period. We show that if this contract period is relatively short, the devaluation is bound to improve the current account on impact, whereas this will deteriorate in the case of a long contract period, and the more so the smaller are adjustment costs in investment. In addition, we study the consequences for the terms of trade and for the stocks of foreign assets and of capital.
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Suggested Citation

  • Nielsen, Soren Bo, 1991. "Current-account effects of a devaluation in an optimizing model with capital accumulation," Journal of Economic Dynamics and Control, Elsevier, vol. 15(3), pages 569-588, July.
  • Handle: RePEc:eee:dyncon:v:15:y:1991:i:3:p:569-588

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    References listed on IDEAS

    1. Araujo, A & Scheinkman, Jose A, 1977. "Smoothness, Comparative Dynamics, and the Turnpike Property," Econometrica, Econometric Society, vol. 45(3), pages 601-620, April.
    2. Sharma, Sunil, 1987. "On the existence and uniqueness of value functions in models of labor market dynamics," Economics Letters, Elsevier, vol. 24(4), pages 349-352.
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    Cited by:

    1. Andreas Haufler & Søren Nielsen, 1997. "Dynamic effects of an anticipated switch from destination- to origin-based commodity taxation," Journal of Economics, Springer, vol. 66(1), pages 43-69, February.
    2. Chan, Tze-Haw, 2002. "Dynamic financial linkages among the Asia Pacific economies: an empirical assessment of real interest parity condition," MPRA Paper 34642, University Library of Munich, Germany.
    3. AKITOBY, Bernardin, 1997. "Rigidité normale, dévaluation et équilibre général intertemporel," Cahiers de recherche 9708, Universite de Montreal, Departement de sciences economiques.
    4. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    5. Hwan-Chyang Lin & Hui-Kuan Tseng, 1993. "Exchange rate shocks and the current account under monopolistic competition: An intertemporal optimization model," Open Economies Review, Springer, vol. 4(2), pages 133-150, June.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics


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