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

This paper shows that 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 markup. A weaker response of prices to nominal shocks strengthens the "expenditure switching" effect of the devaluation to the benefit of the current account. We first analyse the relationship between the mark-up and the real rigidity in a simple closed economy model. We then show numerically how the mark-up can affect the response of the current account to monetary shocks.