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

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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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Bibliographic Info

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

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References

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  1. Marco Lippi & Lucrezia Reichlin, 1993. "The dynamic effects of aggregate demand and supply disturbances: comment," ULB Institutional Repository 2013/10159, ULB -- Universite Libre de Bruxelles.
  2. Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December.
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  13. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," Working Paper 94-2, Federal Reserve Bank of Atlanta.
  14. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 92-13, Federal Reserve Bank of Atlanta.
  15. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  16. Hilde Christiane Bjørnland, 1997. "Estimating Core Inflation - The Role of Oil Price Shocks and Imported Inflation," Discussion Papers 200, Research Department of Statistics Norway.
  17. Solow, Robert M, 1997. "Is There a Core of Usable Macroeconomics We Should All Believe In?," American Economic Review, American Economic Association, vol. 87(2), pages 230-32, May.
  18. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper 95-7, Federal Reserve Bank of Atlanta.
  19. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  20. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
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  23. 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).
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Citations

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Cited by:
  1. Tatiana Cesaroni, 2013. "Economic integration and industrial sector fluctuations: evidence from Italy," Economics Bulletin, AccessEcon, vol. 33(2), pages 944-958.
  2. 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, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  3. Mehrara, Mohsen & Oskoui, Kamran Niki, 2007. "The sources of macroeconomic fluctuations in oil exporting countries: A comparative study," Economic Modelling, Elsevier, vol. 24(3), pages 365-379, May.

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