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Drivers of consumer prices and exchange rates in small open economies

Author

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  • Corbo, Vesna

    (Monetary Policy Department, Central Bank of Sweden)

  • Di Casola, Paola

    (Monetary Policy Department, Central Bank of Sweden)

Abstract

We study the fluctuations of exchange rates and consumer prices in two small open economies, Sweden and Canada, using a structural Bayesian VAR. Four domestic and two global shocks are identified through zero and sign restrictions. For both economies, we find that the main driver of consumer price inflation is the global demand shock. A negative global demand shock is not only deflationary for the small open economy, but also depreciates its currency. Hence, the observed exchange rate pass-through following this shock is of opposite sign to what is usually expected. Finally, exogenous shocks to the Exchange rate are less important drivers of exchange rate movements than in many other structural models.

Suggested Citation

  • Corbo, Vesna & Di Casola, Paola, 2020. "Drivers of consumer prices and exchange rates in small open economies," Working Paper Series 387, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0387
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    1. Bacchetta, Philippe & Chikhani, Pauline, 2020. "On the Weakness of the Swedish Krona," CEPR Discussion Papers 15468, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Exchange rate pass-through; consumer prices; import prices; monetary policy; global shocks; SVAR;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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