Expectations,the exchange rate,and the current account

A critical examination is undertaken of the relationship between the exchange rate and the current account in a small open economy. Theoretically, the correlation between the exchange rate and the current account seems to be ambiguous. In particular, the association between movements in the exchange rate and the current account is likely to depend in an essential manner on the nature of exogenous disturbances affecting the two variables simultaneously. Lastly, the question of the role of an optimal monetary policy and the choice of an exchange rate regime in an uncertain environment is raised.