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Exchange Rate, Cross Elasticities Between Exports and Imports and Current Account Sustainability: The Spanish Case

Luis Sastre ()
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Luis Sastre: Universidad Nacional de Educaci¨®n a Distancia, Calle de Juan del Rosal, 14, 28040 Madrid, SPAIN

Review of Economics & Finance, 2016, vol. 6, 32-46

Abstract: This paper presents an analytical reformulation of the traditional approach to current account sustainability. We adopt a perspective according to which the independence of GDP and exchange rates cannot be postulated in very open economies, hence, the Marshall-Lerner condition cannot be met. Therefore, we analyze four different propositions based on different cross elasticities between exports and imports. Those propositions have theoretical implications about sustainability of the current account and the external debt . We use a dynamic stochastic general equilibrium (DGSE) macroeconomic model to simulate the impact of variations in exchange rates, cross elasticity between imports and exports, and consumption tax rate on the Spanish economy and, particularly, on its current account sustainability.

Keywords: Marshall-Lerner condition; Current account sustainability; Macroeconomic model of dynamic stochastic general equilibrium; Cross elasticities export-import (search for similar items in EconPapers)
JEL-codes: F41 F44 F30 F11 (search for similar items in EconPapers)
Date: 2016
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