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

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  • Bermingham, Colin

    (Central Bank and Financial Services Authority of Ireland)

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    Abstract

    Ireland has no ability to affect the exchange rate through interest rates since the adoption of the euro. This paper provides a theoretically transparent method for analysing the impact of an exchange rate shock on employment and inflation in this context. The split between the tradable and non-tradable sectors of the economy is highlighted. A small, calibrated model adapted from Barry (1997) is used in the paper. The equations in this paper are derived under less restrictive assumptions making the results more widely applicable. The parameters of the model can be changed easily to reflect the structure of the economy and to conduct scenario analyses. A practical application is provided using a specific calibration and set of assumptions and the sensitivity of the results to the calibrated parameters and assumptions is discussed.

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    File URL: http://www.centralbank.ie/publications/documents/2RT05.pdf
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    Bibliographic Info

    Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 2/RT/05.

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    Length: 30 pages
    Date of creation: Apr 2005
    Date of revision:
    Handle: RePEc:cbi:wpaper:2/rt/05

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    1. Michael B. Devereux & Charles Engel, 2002. "Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange Rate Disconnect," NBER Working Papers 8858, National Bureau of Economic Research, Inc.
    2. Baker, Terence J. & FitzGerald, John & Honohan, Patrick, 1996. "Economic Implications for Ireland of EMU," Research Series, Economic and Social Research Institute (ESRI), number PRS28.
    3. Eleanor Doyle, 2004. "Exchange rate pass-through in a small open economy: the Anglo-Irish case," Applied Economics, Taylor & Francis Journals, vol. 36(5), pages 443-455.
    4. Amit Kara & Edward Nelson, 2003. "The Exchange Rate and Inflation in the UK," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 585-608, November.
    5. Anderton, Robert, 2003. "Extra-euro area manufacturing import prices and exchange rate pass-through," Working Paper Series 0219, European Central Bank.
    6. 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.
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