Price rigidity, the mark-up, and the dynamics of the current account

The degree of competition affects the current account response to nominal shocks. The mechanism hinges on the relationship between the mark-up and the degree of real rigidity of prices. In a model with intermediate goods, the degree of real rigidity increases in the mark-up. A weaker response of prices to nominal shocks strengthens the "expenditure switching" effect of the devaluation to the benefit of the current account. We analyse the relationship between the mark-up and the real rigidity in a simple closed economy model and show numerically how the mark-up can affect the response of the current account to monetary shocks in an open economy.