Current account and exchange rate dynamics

Lilia Cavallari

No 38, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: In the theoretical part of the paper, we analyze 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. In general this affects welfare ambigously, since the welfare gain from the monetary expansion reduces as net foreign assets become smaller and eventually turns negative if the economy accumulates too large a debt towards the rest of the world. The empirical part of the paper provides evidence in favour of a crucial role of monetary shocks in current account fluctuations. This holds especially for the more open economies in the G7, namely the European countries and Canada.

Keywords: small open economy; current account; monetary transmission mechanism; structural VAR. (search for similar items in EconPapers)
JEL-codes: E6 F4 (search for similar items in EconPapers)
Pages: 37
Date: 1999-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.dipecodir.it/wpsap/data/wp38.pdf (application/pdf)

Related works:
Journal Article: Current Account and Exchange Rate Dynamics (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sap:wpaper:wp38

Access Statistics for this paper

More papers in Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma
Bibliographic data for series maintained by Luisa Giuriato ().