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Assessing estimates of the exchange rate pass-through

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    Abstract

    This paper uses Monte Carlo techniques to address the question: are structural VAR estimates of exchange rate pass-through a useful tool to evaluate macroeconomic models of open economies? The data generating process is a small open economy DSGE model with incomplete pass-through. The results suggest that (i) the pass-through estimates obtained from a first-differenced VAR exhibit a systematic downward bias; (ii) by contrast, estimates derived from a low order vector equilibrium correction model are fairly accurate; but (iii) standard cointegration tests have low power to detect the cointegration relations implied by the DSGE model.

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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2007/WP-200712/
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    Bibliographic Info

    Paper provided by Norges Bank in its series Working Paper with number 2007/12.

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    Length: 60 pages
    Date of creation: 11 Jan 2008
    Date of revision:
    Handle: RePEc:bno:worpap:2007_12

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    Keywords: Exchange rate pass-through; structural VAR; DSGE models; cointegration;

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