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Economic Fluctuations in a Small Open Economy – Real versus Nominal Shocks

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Author Info
Hilde C. Bjørnland () (Statistics Norway)

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Abstract

This paper analyses the role of real and nominal shocks in explaining business cycles in a small open economy like that of Norway. In particular, we study the sources behind real exchange rate fluctuations since the collapse of the Bretton Woods agreement. Imposing long run restrictions implied by economic theory on a structural vector autoregression (VAR) model containing GDP, unemployment (or price), real wage and the real exchange rate, four structural shocks are identified; Velocity (or monetary), fiscal, productivity and labour supply shocks. The model is also augmented to allow for oil price shocks.The identified shocks and their impulse responses are consistent with an open economy (Keynesian) model of economic fluctuations, and highlights the exchange rate as a transmission mechanism in a small open and energy based economy. Especially, I have found a plausible sequence of shocks (productivity shocks in the 1970s, velocity shocks in the mid-1980s, productivity and labour supply shocks in the late 1980s, and velocity and fiscal shocks in the early 1990s), which help to explain the evolution of GDP, unemployment, price, real wage and the real exchange rate. The results are robust to alternative specifications of the model and are stable over the sample.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 215.

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Date of creation: Mar 1998
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Handle: RePEc:ssb:dispap:215

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Related research
Keywords: Real and nominal shocks; exchange rate fluctuations; purchasing power parity; dynamic restrictions; structural VAR;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

References listed on IDEAS
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    Other versions:
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    Other versions:
  3. Serletis, Apostolos & Zimonopoulos, Grigorios, 1997. "Breaking Trend Functions in Real Exchange Rates: Evidence from Seventeen OECD Countries," Journal of Macroeconomics, Elsevier, vol. 19(4), pages 781-802, October. [Downloadable!] (restricted)
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  5. Hilde Christiane Bjørnland, 1997. "Estimating Core Inflation - The Role of Oil Price Shocks and Imported Inflation," Discussion Papers 200, Research Department of Statistics Norway. [Downloadable!]
  6. Kari H. Eika & Neil R. Ericsson & Ragnar Nymoen, 1996. "Hazards in implementing a monetary conditions index," International Finance Discussion Papers 568, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  17. Blinder, Alan S, 1997. "Is There a Core of Practical Macroeconomics That We Should All Believe?," American Economic Review, American Economic Association, vol. 87(2), pages 240-43, May. [Downloadable!] (restricted)
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  20. Jacobson, Tor & Jansson, Per & Vredin, Anders & Warne, Anders, 1999. "A VAR Model for Monetary Policy Analysis in a Small Open Economy," Working Paper Series 77, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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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. Jaanus Raim, 2004. "The Alternative to the Existing System of the Concepts about Purchasing Power Parity Deviations . Derived from the Estonian Experience," Working Papers 115, School of Economics and Business Administration, Tallinn University of Technology. [Downloadable!]
  2. Tatiana Cesaroni, 2008. "Economic integration and industrial sector fluctuations: evidence from Italy," ISAE Working Papers 106, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
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