Advantages of Fixed Exchange Rate Regime from a General Equilibrium Perspective
AbstractIn 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 InfoPaper provided by Latvijas Banka in its series Working Papers with number 2009/04.
Date of creation: 25 Nov 2009
Date of revision:
DSGE; small open economy; exchange rate policy; Bayesian estimation;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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-CMP-2009-12-11 (Computational Economics)
- NEP-DGE-2009-12-11 (Dynamic General Equilibrium)
- NEP-IFN-2009-12-11 (International Finance)
- NEP-MON-2009-12-11 (Monetary Economics)
- NEP-OPM-2009-12-11 (Open Economy Macroeconomic)
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