Current Account and Exchange Rate Dynamics

Lilia Cavallari

Economic Notes, 2001, vol. 30, issue 1, 27-51

Abstract: type="main" xml:lang="en">

The theoretical part of this paper analyses the positive and normative effects of a surprise monetary expansion in a small open economy characterized by imperfect competition and short-run price rigidity in the domestic sector. The temporary output boom fostered by the monetary expansion is shown to come at the cost of a permanent squeeze of the domestic sector. This affects welfare ambiguously, as the overall welfare consequences of the monetary expansion may eventually turn negative for a critical value of external assets. The empirical part of the paper provides evidence in favour of a key role of monetary shocks in driving current account fluctuations in seven major industrialized countries.

(J.E.L.: E61, F41).

Date: 2001
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Working Paper: Current account and exchange rate dynamics (1999)
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