Current account

Abstract: We develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models or traditional sticky-price Keynesian models Our analysis leads to a novel perspective on the international welfare spillovers due to monetary and fiscal policies

Abstract: One of the most important developments over the past three decades has been the spread of liberal economic ideas and policies throughout the world. These policies have affected the lives of millions of people, yet our most sophisticated political economy models do not adequately capture influences on these policy choices. Evidence suggests that the adoption of liberal economic practices is highly clustered both temporally and spatially. We hypothesize that this clustering might be due to processes of policy diffusion. We think of diffusion as resulting from one of two broad sets of forces: one in which mounting adoptions of a policy alter the benefits of adopting for others and another in which adoptions provide policy relevant information about the benefits of adopting. We develop arguments within these broad classes of mechanisms, construct appropriate measures of the relevant concepts, and test their effects on liberalization and restriction of the current account, the capital account, and the exchange rate regime. Our findings suggest that domestic models of foreign economic policy making are insufficient. The evidence shows that policy transitions are influenced by international economic competition as well as the policies of a country's sociocultural peers. We interpret the latter influence as a form of channeled learning reflecting governments' search for appropriate models for economic policy.