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Current Account and Exchange Rate Dynamics
Author(s) -
Cavallari Lilia
Publication year - 2001
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/1468-0300.00046
Subject(s) - economics , monetary economics , boom , current account , surprise , imperfect competition , welfare , exchange rate , imperfect , normative , small open economy , macroeconomics , international economics , microeconomics , market economy , psychology , social psychology , linguistics , philosophy , epistemology , environmental engineering , engineering
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).