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Employment and Inflation Responses to an Exchange Rate Shock in a Calibrated Model

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  • Colin Bermingham

    (Central Bank and Financial Services Authority of Ireland, Dublin)

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    Abstract

    Ireland has no ability to affect the exchange rate through interest rates following the adoption of the euro. This paper provides a theoretically transparent method for analysing the impact of an exchange rate shock on employment and the aggregate price level in this context. The split between the tradable and non-tradable sectors of the economy is highlighted. The model is used to examine a specific exchange rate shock. The results of this calibration suggest that a sustained increase of 15 per cent in the value of the euro would reduce employment by 1.5 per cent and the domestic price level by about 7.3 per cent.

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    File URL: http://www.esr.ie/Vol37_1/02_Birmingham_article.pdf
    File Function: First version, 2006
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    Bibliographic Info

    Article provided by Economic and Social Studies in its journal Economic and Social Review.

    Volume (Year): 37 (2006)
    Issue (Month): 1 ()
    Pages: 27-46

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    Handle: RePEc:eso:journl:v:37:y:2006:i:1:p:27-46

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    1. Kenny, Geoff & McGettigan, Donal, 1996. "Exchange Rate Pass-Through and Irish Import Prices," Research Technical Papers 6/RT/96, Central Bank of Ireland.
    2. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 0243, European Central Bank.
    3. Slevin, Geraldine, 2003. "Structural Model Of Irish Inflation," Research Technical Papers 1/RT/03, Central Bank of Ireland.
    4. Barry, F, 1997. "Dangers for Ireland of and EMU without the UK : Some Calibration Results," Papers 97/20, College Dublin, Department of Political Economy-.
    5. M.B. Devereux & Ch. Engel, 2003. "Exchange Rate Pass-Through, Exchange Rate Volatility, and ExchangeRate Disconnect," DNB Staff Reports (discontinued) 77, Netherlands Central Bank.
    6. Amit Kara & Edward Nelson, 2002. "The Exchange Rate and Inflation in the UK," Discussion Papers 11, Monetary Policy Committee Unit, Bank of England.
    7. Baker, Terence J. & FitzGerald, John & Honohan, Patrick, 1996. "Economic Implications for Ireland of EMU," Research Series, Economic and Social Research Institute (ESRI), number PRS28.
    8. Kenny, Geoff & McGettigan, Donal, 1997. "A Monetary Approach to the Analysis of Inflation in Ireland," Research Technical Papers 4/RT/97, Central Bank of Ireland.
    9. Bradley, John & Fitz Gerald, John & Kearney, Ide, 1993. "Modelling supply in an open economy using a restricted cost function," Economic Modelling, Elsevier, vol. 10(1), pages 11-21, January.
    10. Anderton, Robert, 2003. "Extra-euro area manufacturing import prices and exchange rate pass-through," Working Paper Series 0219, European Central Bank.
    11. Kenny, Geoff & McGettigan, Donal, 1996. "Non-Traded, Traded and Aggregate Inflation in Ireland: Further Evidence," Research Technical Papers 5/RT/96, Central Bank of Ireland.
    12. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
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