The Dynamics of the Real Exchange Rate and Current Account in a Small Open Economy: Australia

1998 ◽  
pp. 85-125 ◽  
Author(s):  
Guay C. Lim ◽  
Jerome L. Stein
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Current Account ◽  
Open Economy ◽  
Small Open Economy ◽  
The Real

scholarly journals FISCAL SHOCKS IN A TWO-SECTOR OPEN ECONOMY WITH ENDOGENOUS MARKUPS

2014 ◽  
Vol 19 (8) ◽  
pp. 1839-1865 ◽  
Author(s):  
Olivier Cardi ◽  
Romain Restout
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Current Account ◽  
Open Economy ◽  
Economy Model ◽  
The Real ◽  
Nontraded Goods ◽  
Capital Intensive ◽  
Exchange Rate Depreciation ◽  
Fiscal Shocks

We use a two-sector neoclassical open economy model with traded and nontraded goods and endogenous markups to investigate the effects of temporary fiscal shocks. One central finding is that theory can be reconciled with evidence once we allow for endogenous markups and assume that the traded sector is more capital-intensive than the nontraded sector. More precisely, although both ingredients are essential to produce the real exchange rate depreciation, only the second ingredient is necessary to account for the simultaneous decline in investment and the current account, in line with the evidence.

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