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

Guay C. Lim () and Paul McNelis ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: 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.

Keywords: sticky price setting; current account; real exchange rate (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2005-11
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:dnbwpp:056

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