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The Role Of The Exchange Rate In A New Keynesian Dsge Model For The South African Economy

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Author Info

  • Sami Alpanda
  • Kevin Kotzé
  • Geoffrey Woglom

Abstract

We build a small open economy New Keynesian dynamic stochastic general equilibrium model for South Africa similar to Steinbach "et al". We abandon their assumption of complete risk sharing with the foreign economy, and introduce country risk shocks to allow deviations from uncovered interest rate parity. These changes allow us to include the exchange rate as an observable variable in the estimation of the model. Using forecast error variance decompositions and historical decompositions, we show that country risk shocks have sizable effects on the South African business cycle. We also explore the optimal monetary policy implications of our model within the context of Taylor rules. Copyright (c) 2010 The Authors. Journal compilation (c) 2010 Economic Society of South Africa.

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Bibliographic Info

Article provided by Economic Society of South Africa in its journal South African Journal of Economics.

Volume (Year): 78 (2010)
Issue (Month): 2 (06)
Pages: 170-191

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Handle: RePEc:bla:sajeco:v:78:y:2010:i:2:p:170-191

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Cited by:
  1. Rangan Gupta & Rudi Steinbach, 2010. "Forecasting Key Macroeconomic Variables of the South African Economy: A Small Open Economy New Keynesian DSGE-VAR Model," Working Papers 201019, University of Pretoria, Department of Economics.
  2. Rangan Gupta & Patrick T. kanda & Mampho P. Modise & Alessia Paccagnini, 2013. "DSGE Model-Based Forecasting of Modeled and Non-Modeled Inflation Variables in South Africa," Working Papers 201374, University of Pretoria, Department of Economics.
  3. Seedwell Hove & Albert Touna Mama & Fulbert Tchana Tchana, 2012. "Monetary policy and commodity terms of trade shocks in emerging market economies," Working Papers 307, Economic Research Southern Africa.
  4. Alun H. Thomas, 2012. "Exchange Rate and Foreign Interest Rate Linkages for Sub-Saharan Africa Floaters," IMF Working Papers 12/208, International Monetary Fund.
  5. Goodness C. Aye & Mehmet Balcilar & Adel Bosch & Rangan Gupta, 2013. "Housing and the Business Cycle in South Africa," Working Papers 201323, University of Pretoria, Department of Economics.

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