nr 056 - Real Exchange Rate and Current Account Dynamics with Sticky Prices and Distortionary Taxes

DNB Working Papers
Date 25 November 2005

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. Key words: sticky price setting, current account, real exchange rate JEL Classification: E52, E62,F41