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

This paper examines the interaction of real exchange rates and current account movements in open economics 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 effects may be greater or lower than under export demand with a low elasticity