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A Small Open Economy New Keynesian DSGE model for a foreign exchange constrained economy

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  • Regassa Senbeta S.

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 in?uenced 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 ?rms 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 di¤erent 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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  2. Troy Matheson, 2006. "Assessing the fit of small open economy DSGEs," Reserve Bank of New Zealand Discussion Paper Series DP2006/11, Reserve Bank of New Zealand.
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  8. Ana Maria Santacreu, 2005. "Reaction functions in a small open economy: What role for non-traded inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2005/04, Reserve Bank of New Zealand.
  9. Christopher Adam & Stephen O'Connell & Edward Buffie, 2008. "Aid volatility, monetary policy rules and the capital account in African economies," WEF Working Papers 0037, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
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  14. Polterovich, Victor & Popov, Vladimir, 2003. "Accumulation of Foreign Exchange Reserves and Long Term Growth," MPRA Paper 20069, University Library of Munich, Germany.
  15. Ndulu,Benno J. & O'Connell,Stephen A. & Bates,Robert H. & Collier,Paul & Soludo,Chukwuma C., 2009. "The Political Economy of Economic Growth in Africa, 1960–2000," Cambridge Books, Cambridge University Press, number 9780521127752, November.
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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 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.
  2. Regassa Senbeta S., 2011. "How applicable are the New Keynesian DSGE models to a typical Low-Income Economy?," Working Papers 2011016, University of Antwerp, Faculty of Applied Economics.

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