Abstract
This paper examines the current-account effect of a devaluation in a Chamberlinian model where both saving and investment are based on intertemporal optimization. It shows that devaluation tends to deteriorate the current account along the time horizon, leading to a reduction of the stock of foreign assets permanently. In contrast to recent work, these real effects do not rely on short-run disequilibrium in the goods or labor market. Besides, a temporary devaluation may generate hysteresis effects on both micro- and macro-economic aspects of a small economy.
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Lin, HC., Tseng, HK. Exchange rate shocks and the current account under monopolistic competition: An intertemporal optimization model. Open Econ Rev 4, 133–150 (1993). https://doi.org/10.1007/BF01000516
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DOI: https://doi.org/10.1007/BF01000516