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

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  • Min Lu

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.

Suggested Citation

  • Min Lu, 2009. "Current account dynamics and optimal monetary policy in a small-open economy," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 2(2), pages 166-193.
    • Handle: RePEc:ids:ijmefi:v:2:y:2009:i:2:p:166-193
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    Cited by:

    1. Agur, Itai & Demertzis, Maria, 2013. "“Leaning against the wind” and the timing of monetary policy," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 179-194.
    2. Min Lu, 2012. "Current account dynamics and optimal monetary policy in a two-country economy," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 5(3), pages 299-324.

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