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Exchange Rates and Asymmetric Shocks in Small Open Economies

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Author Info
Alexius, Annika (Department of Economics)
Post, Erik () (Department of Economics)

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Abstract

If floating exchange rates stabilize shocks rather than create shocks, a country that joins a monetary union or fixes its exchange rate looses a stabilizing mechanism. We use a first difference structural VAR on trade weighted macroeconomic data to study the role of floating exchange rates for five "small open economies" with inflation targets. By including both domestic and foreign variables and using a combination of long and short-run restrictions, we identify asymmetric shocks more carefully than previous studies. Only in Sweden and Canada does the nominal exchange rate appreciate significantly in response to asymmetric demand shocks and depreciate to asymmetric supply shocks. Most exchange rate movements are caused by speculation and are not responses to fundamental shocks. However, these exchange rate shocks have negligible effects on output and inflation. Our findings indicate that exchange rates are neither stabilizing nor destabilizing but may be loosely characterized as disconnected from the rest of the economy.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2005:10.

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Length: 31 pages
Date of creation: 15 Mar 2005
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Handle: RePEc:hhs:uunewp:2005_010

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
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Related research
Keywords: Exchange rates; asymmetric shocks; structural VAR;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
  5. Alexius, Annika & Post, Erik, 2005. "Exchange Rates and Asymmetric Shocks in Small Open Economies," Working Paper Series 2005:10, Uppsala University, Department of Economics. [Downloadable!]
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  6. Buiter, Willem H, 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Richard Meese & Kenneth Rogoff, 1983. "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 67-112 National Bureau of Economic Research, Inc. [Downloadable!]
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  8. Alexius, Annika, 2005. "Productivity shocks and real exchange rates," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 555-566, April. [Downloadable!] (restricted)
  9. Roland Straub & Ivan Tchakarov, 2004. "Non-fundamental exchange rate volatility and welfare," Working Paper Series 328, European Central Bank. [Downloadable!]
  10. Bergvall, Anders, 2000. "Exchange Rate Regimes and Macroeconomic Stability: The Case of Sweden 1972-1996," Working Paper Series 2000:25, Uppsala University, Department of Economics. [Downloadable!]
  11. Bergvall, A., 2000. "Exchange Rate Regimes and Macroeconomic Stability: The Case of Sweden 1972-1996," Papers 2000:25, Uppsala - Working Paper Series.
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  14. Artis, Michael J & Ehrmann, Michael, 2000. "The Exchange Rate - A Shock-Absorber or Source of Shocks? A Study of Four Open Economies," CEPR Discussion Papers 2550, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Annika Alexius & Mikael Carlsson, 2005. "Measures of Technology and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 299-307, 06. [Downloadable!] (restricted)
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  16. Eduard Hochreiter & Anton Korinek & Pierre L. Siklos, 2003. "The potential consequences of alternative exchange rate regimes: A study of three candidate regions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(4), pages 327-349. [Downloadable!]
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  19. Canzoneri, Matthew B & Vallés Liberal, Javier & Viñals, José, 1996. "Do Exchange Rates Move to Address International Macroeconomic Imbalances?," CEPR Discussion Papers 1498, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Annika Alexius & Erik Post, 2008. "Exchange rates and asymmetric shocks in small open economies," Empirical Economics, Springer, vol. 35(3), pages 527-541, November. [Downloadable!] (restricted)
    Other versions:
  2. Hallberg, Daniel, 2006. "Cross-national differences in income poverty among Europe´s 50+," Working Paper Series 2006:14, Uppsala University, Department of Economics. [Downloadable!]
  3. Chen, Jie, 2006. "The Dynamics of Housing Allowance Claims in Sweden: A discrete-time hazard analysis," Working Paper Series 2006:1, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  4. Berg, Lennart & Berger, Tommy, 2005. "The Q theory and the Swedish housing market –an empirical test," Working Paper Series 2005:19, Uppsala University, Department of Economics. [Downloadable!]
  5. Engström, Per & Holmlund, Bertil, 2006. "Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden," Working Paper Series 2006:12, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  6. Alexius, Annika & Post, Erik, 2006. "Cointegration and the stabilizing role of exchange rates," Working Paper Series 2006:8, Uppsala University, Department of Economics. [Downloadable!]
  7. Engström, Per & Holmlund, Bertil, 2005. "Worker Absenteeism in Search Equilibrium," Working Paper Series 2005:22, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
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