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Real Exchange Rate and Current Account Dynamics with Sticky Prices and Distortionary Taxes

  • Guay C. Lim
  • Paul D. McNelis

This paper examines the interaction of real exchange rates and current account movements in open economies subject to monopolistic competition with sticky price-setting behavior and distortionary taxes. We find that the correlations between fiscal balances and the current account depend on the elasticity of net exports with respect to the real exchange rate. Under highly elastic export demand, the welfare e�ects may be greater or lower than under export demand with a low elasticity.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 056.

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Date of creation: Nov 2005
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Handle: RePEc:dnb:dnbwpp:056
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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," NBER Working Papers 10253, National Bureau of Economic Research, Inc.
  2. Sunghyun Henry Kim & Jinill Kim, 2006. "Welfare Effects of Tax Policy in Open Economies: Stabilization and Cooperation," Computing in Economics and Finance 2006 71, Society for Computational Economics.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," NBER Technical Working Papers 0282, National Bureau of Economic Research, Inc.
  4. Frank Smets & Ignazio Angeloni & Gunter Coenen, 2003. "Persistence, the Transmission Mechanism and Robust Monetary Policy," Computing in Economics and Finance 2003 137, Society for Computational Economics.
  5. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
  6. Kollmann, Robert, 2008. "Welfare-Maximizing Operational Monetary And Tax Policy Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 112-125, April.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  9. Pierpaolo Benigno & Michael Woodford, 2003. "Optimal monetary and fiscal policy: a linear-quadratic approach," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  11. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 0171, European Central Bank.
  12. Collard, Fabrice & Juillard, Michel, 1999. "Accuracy of stochastic perturbuation methods: the case of asset pricing models," CEPREMAP Working Papers (Couverture Orange) 9922, CEPREMAP.
  13. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2005. "Productivity shocks, budget deficits and the current account," Working Paper Series 0509, European Central Bank.
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