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A small open economy new Keynesian DSGE model for a foreign exchange constrained economy

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  • SENBETA, Sisay Regassa

Abstract

Firms in many low income countries depend entirely on imported capital and intermediate inputs. As a result, in these countries economic activity is considerably influenced by the capacity of the economy to import these inputs which, in turn, depends on the availability and cost of foreign exchange. In this study we introduce foreign exchange availability as an additional constraint faced by firms into an otherwise standard small open economy New Keynesian DSGE model. The model is then calibrated for a typical Sub Saharan African economy and the behaviour of the model in response to both domestic and external shocks is compared with the standard model. The impulse response functions of the two models are the same qualitatively for most of the variables though the model with foreign exchange constraint generates more variability in most of the variables than the standard model. This behaviour of the model with foreign exchange constraint is consistent with the stylized facts of low income countries. Furthermore, for variables for which the two models have different impulse response functions, the model with foreing exchange constraint is both theoretically consistent and matches the stylized facts.

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Bibliographic Info

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2011004.

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Length: 48 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:ant:wpaper:2011004

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Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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Keywords: New Keynesian DSGE; Foreign exchange constraint; Low income countries; Sub-Saharan Africa;

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  1. Adam, Christopher S. & Buffie, Edward & O'Connell, Stephen & Pattillo, Catherine, 2008. "Monetary Policy Rules for Managing Aid Surges in Africa," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) RP2008/77, World Institute for Development Economic Research (UNU-WIDER).
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. A Small Open Economy New Keynesian DSGE model for a foreign exchange constrained economy
    by Christian Zimmermann in NEP-DGE blog on 2011-05-26 14:51:36
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Cited by:
  1. Senbeta, Sisay, 2011. "How applicable are the new keynesian DSGE models to a typical low-income economy?," MPRA Paper 30931, University Library of Munich, Germany.
  2. SENBETA, Sisay Regassa, 2013. "Informality and macroeconomic fluctuations: A small open economy New Keynesian DSGE model with dual labour markets," Working Papers 2013002, University of Antwerp, Faculty of Applied Economics.

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