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Exchange rates and asymmetric shocks in small open economies

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  • Annika Alexius

    ()

  • Erik Post

Abstract

If floating exchange rates stabilize shocks rather than create shocks, a country that joins a monetary union or fixes its exchange rate looses a stabilizing mechanism. We use a first difference structural VAR on trade weighted macroeconomic data to study the role of floating exchange rates for five "small open economies" with inflation targets. By including both domestic and foreign variables and using a combination of long and short-run restrictions, we identify asymmetric shocks more carefully than previous studies. Only in Sweden and Canada does the nominal exchange rate appreciate significantly in response to asymmetric demand shocks and depreciate to asymmetric supply shocks. Most exchange rate movements are caused by speculation and are not responses to fundamental shocks. However, these exchange rate shocks have negligible effects on output and inflation. Our findings indicate that exchange rates are neither stabilizing nor destabilizing but may be loosely characterized as disconnected from the rest of the economy.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 35 (2008)
Issue (Month): 3 (November)
Pages: 527-541

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Handle: RePEc:spr:empeco:v:35:y:2008:i:3:p:527-541

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Keywords: Exchange rates; Asymmetric shocks; Structural VAR; F31;

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References

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  1. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
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Citations

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Cited by:
  1. Alexius, Annika & Post, Erik, 2006. "Cointegration and the stabilizing role of exchange rates," Working Paper Series 2006:8, Uppsala University, Department of Economics.
  2. Per Engström & Bertil Holmlund, 2006. "Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden," CESifo Working Paper Series 1736, CESifo Group Munich.
  3. Annika Alexius & Erik Post, 2008. "Exchange rates and asymmetric shocks in small open economies," Empirical Economics, Springer, vol. 35(3), pages 527-541, November.
  4. Chen, Jie, 2006. "The Dynamics of Housing Allowance Claims in Sweden: A discrete-time hazard analysis," Working Paper Series 2006:1, Uppsala University, Department of Economics.
  5. Berg, Lennart & Berger, Tommy, 2005. "The Q theory and the Swedish housing market –an empirical test," Working Paper Series 2005:19, Uppsala University, Department of Economics.
  6. Hallberg, Daniel, 2006. "Cross-national differences in income poverty among Europe´s 50+," Working Paper Series 2006:14, Uppsala University, Department of Economics.

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