Current account dynamics and optimal monetary policy in a small-open economy

Min Lu

International Journal of Monetary Economics and Finance, 2009, vol. 2, issue 2, 166-193

Abstract: This paper studies a small open economy with two sectors. In a perfect foresight, rational expectation general equilibrium model, with sticky prices in the non-traded goods sector, the current account responses to monetary shocks depend on the elasticity of substitution between consumption and risk aversion, the country's initial net foreign asset position, and the degree of monopolistic competition. The current account reacts quite efficiently to technological shocks in a small open economy. The welfare gain for households from adopting optimal monetary policy in contrast to constant money growth rule is quantitatively small.

Keywords: open economy macroeconomics; current account dynamics; optimal monetary policy; small open economy. (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijmefi:v:2:y:2009:i:2:p:166-193

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