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Advantages of Fixed Exchange Rate Regime from a General Equilibrium Perspective

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  • Viktors Ajevskis
  • Kristine Vitola

Abstract

In this paper we estimate a small open economy DSGE model for Latvia following Lubik and Schorfheide (2007) using Bayesian methods. The estimates of the structural parameters fall within plausible ranges. Simulation results suggest that under inflation targeting inflation turns out to be more volatile than under the peg in the case of Latvia. Additional concern for output stabilisation accounts for lower inflation variability while it is still higher than under existing exchange rate regime with ±1% fluctuation bands. The model results therefore support the existing exchange rate policy.

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Bibliographic Info

Paper provided by Latvijas Banka in its series Working Papers with number 2009/04.

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Date of creation: 25 Nov 2009
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Handle: RePEc:ltv:wpaper:200904

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Related research

Keywords: DSGE; small open economy; exchange rate policy; Bayesian estimation;

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References

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  2. Marco Del Negro & Frank Schorfheide & Frank Smets & Raf Wouters, 2004. "On the fit and forecasting performance of New Keynesian models," Working Paper, Federal Reserve Bank of Atlanta 2004-37, Federal Reserve Bank of Atlanta.
  3. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  4. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(2), pages 195-222, October.
  5. Finn E. Kydland & Edward C. Prescott, 1994. "The computational experiment: an econometric tool," Staff Report, Federal Reserve Bank of Minneapolis 178, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Kristine Vitola & Ludmila Fadejeva, 2010. "Asset Prices and Financial Frictions in Monetary Transmission: The Case of Latvia," Working Papers 2010/03, Latvijas Banka.
  2. Konstantins Benkovskis & Ludmila Fadejeva & Krista Kalnberzina, 2010. "Price Setting Behaviour in Latvia: Descriptive Evidence from CPI Microdata," Discussion Papers 2010/01, Latvijas Banka.
  3. Viktors Ajevskis & Kristine Vitola, 2011. "Housing and Banking in a Small Open Economy DSGE Model," Working Papers 2011/03, Latvijas Banka.
  4. Viktors Ajevskis & Kristine Vitola, 2011. "Fixed Exchange Rate Versus Inflation Targeting: Evidence from DSGE Modelling," Working Papers 2011/02, Latvijas Banka.

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