Title: Current account dynamics and optimal monetary policy in a small-open economy

Authors: Min Lu

Addresses: Department of Finance and Economics, School of Business, Robert Morris University, Moon Township, 15108 Pennsylvania, USA

Abstract: This paper studies a small open economy with two sectors. In a perfect foresight, rational expectation general equilibrium model, with sticky prices in the non-traded goods sector, the current account responses to monetary shocks depend on the elasticity of substitution between consumption and risk aversion, the country|s initial net foreign asset position, and the degree of monopolistic competition. The current account reacts quite efficiently to technological shocks in a small open economy. The welfare gain for households from adopting optimal monetary policy in contrast to constant money growth rule is quantitatively small.

Keywords: open economy macroeconomics; current account dynamics; optimal monetary policy; small open economy.

DOI: 10.1504/IJMEF.2009.024838

International Journal of Monetary Economics and Finance, 2009 Vol.2 No.2, pp.166 - 193

Published online: 01 May 2009 *

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