How does a devaluation affect the current account?

This paper explores how an exchange rate devaluation affects the current ac count in a sticky-price inter-temporal optimizing model, The main issue add ressed is how the features of international pricing affect the response of the current account. When prices are all set in the producer's currencies, the effect of a devaluation on the current account depends on the conventio nal Marshall-Lerner conditions. This is fundamentally an a-temporal conditi on (depending on the elasticity of substitution between home and foreign go ods). However, when prices are all set in consumer's currencies, the respon se of the current account depends upon the size of the inter-temporal elast icity of substitution of consumption across time periods. This represents a n inter-temporal condition. When pricing-to-market is partial, the effect o f devaluation on the current account depends on the strength of the a-tempo ral elasticity relative to the inter-temporal elasticity. (C) 2000 Elsevier Science Ltd. All rights reserved. JEL classification: F32; F41.