Advanced Search
MyIDEAS: Login

Simulating the Effects of Imperfect Credibility: How Does the Peso Problem Affect the Real Economy?

Contents:

Author Info

  • Mattila, V.M.
Registered author(s):

    Abstract

    In this paper we analyse the macroeconomic effects of peso problems by simulating numerically a small-scale rational expectations macromodel. The model is a conventional IS-LM-AS model of an open economy under floating exchange rates. The peso problem has been incorporated in the model by assuming that the money supply process entails a small but nonzero probability of a sizable discrete shift in the money supply. In addition, the severity of a peso problem can vary over time. The procedure used in solving our model is more complicated than the standard solution methods for rational expectation models in that there are two dates at which expectations are formed. Both deterministic and stochastic simulations were used in the analysis. Results from the deterministic simulations suggest that the presence of the peso problem leads to an overvalued real exchange rate and a higher ex ante real interest rate, which results in output losses. In the stochastic simulations, the values of the IS, AS and monetary disturbances vary along with the severity of the peso problem. The simulations show that the presence of a variable peso problem affects the correlations between macroeconomic variables, especially between the ex post yield differential and either the real exchange rate or the output gap. In the case of conventional (non-autocorrelated) IS, AS and monetary disturbances, these correlation coefficients are equal to zero. The inclusion of a variable peso problem in the simulation model changes these results: the ex post yield differential is now correlated with the real exchange rate and the output gap. In the empirical part of the paper we demonstrate the applicability of our simulation results using Canada and the United Kingdom as examples.

    Download Info

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below under "Related research" whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Bibliographic Info

    Paper provided by Bank of Finland. Research Department. in its series Bank of Finland - Studies in Economics and Finance with number 24/98.

    as in new window
    Length: 45 pages
    Date of creation: 1998
    Date of revision:
    Handle: RePEc:fth:bfsefi:24/98

    Contact details of provider:
    Postal: Bank of Finland. Research Department. P.O. Box 160, FIN-00101, Helsinki, Finland.
    Web page: http://www.bof.fi/
    More information through EDIRC

    Related research

    Keywords: FINANCIAL POLICY ; ECONOMIC MODELS ; CURRENCIES;

    Find related papers by JEL classification:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Kortelainen, Mika, 2001. "Actual and perceived monetary policy rules in a dynamic general equilibrium model of the euro area," Research Discussion Papers 3/2001, Bank of Finland.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:fth:bfsefi:24/98

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.