A new approach to estimating equilibrium exchange rates for small open economies: The case of Canada
AbstractThis paper proposes a new approach to estimating equilibrium exchange rates for small open economies. We set up a simple structural model of output, the rate of in ation and the real exchange rate. These observed variables are explained by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974-2008 we jointly estimate the unobserved components and the structural pa- rameters using the Kalman lter and Bayesian technique. We nd that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate.
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Bibliographic InfoPaper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 0509.
Length: 25 pages
Date of creation: Aug 2009
Date of revision:
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Postal: Am Stadtgraben 9, 48143 Münster, Germany
Web page: http://www1.wiwi.uni-muenster.de/cqe/
More information through EDIRC
equilibrium exchange rate; unobserved components; Kalman lter; Bayesian analysis; Importance sampling;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-11 (All new papers)
- NEP-CBA-2009-12-11 (Central Banking)
- NEP-IFN-2009-12-11 (International Finance)
- NEP-OPM-2009-12-11 (Open Economy Macroeconomics)
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