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Employment and Inflation Responses to an Exchange Rate Shock in a Calibrated Model

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  • Colin Bermingham

    (Central Bank and Financial Services Authority of Ireland, Dublin)

Abstract

Ireland has no ability to affect the exchange rate through interest rates following the adoption of the euro. This paper provides a theoretically transparent method for analysing the impact of an exchange rate shock on employment and the aggregate price level in this context. The split between the tradable and non-tradable sectors of the economy is highlighted. The model is used to examine a specific exchange rate shock. The results of this calibration suggest that a sustained increase of 15 per cent in the value of the euro would reduce employment by 1.5 per cent and the domestic price level by about 7.3 per cent.

Suggested Citation

  • Colin Bermingham, 2006. "Employment and Inflation Responses to an Exchange Rate Shock in a Calibrated Model," The Economic and Social Review, Economic and Social Studies, vol. 37(1), pages 27-46.
    • Handle: RePEc:eso:journl:v:37:y:2006:i:1:p:27-46
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    References listed on IDEAS

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    1. Kenny, Geoff & McGettigan, Donal, 1996. "Exchange Rate Pass-Through and Irish Import Prices," Research Technical Papers 6/RT/96, Central Bank of Ireland.
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    8. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 13(3), pages 55-69, Autumn.
    9. Anderton, Robert, 2003. "Extra-euro area manufacturing import prices and exchange rate pass-through," Working Paper Series 219, European Central Bank.
    10. Kenny, Geoff & McGettigan, Donal, 1997. "A Monetary Approach to the Analysis of Inflation in Ireland," Research Technical Papers 4/RT/97, Central Bank of Ireland.
    11. Slevin, Geraldine, 2003. "Structural Model Of Irish Inflation," Research Technical Papers 1/RT/03, Central Bank of Ireland.
    12. Kenny, Geoff & McGettigan, Donal, 1996. "Non-Traded, Traded and Aggregate Inflation in Ireland: Further Evidence," Research Technical Papers 5/RT/96, Central Bank of Ireland.
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    14. Eleanor Doyle, 2004. "Exchange rate pass-through in a small open economy: the Anglo-Irish case," Applied Economics, Taylor & Francis Journals, vol. 36(5), pages 443-455.
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    Cited by:

    1. Daragh Clancy & Rossana Merola, 2016. "ÉIRE Mod: A DSGE Model for Ireland," The Economic and Social Review, Economic and Social Studies, vol. 47(1), pages 1-31.
    2. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.
    3. Clancy, Daragh & Merola, Rossana, 2014. "The effect of macroprudential policy on endogenous credit cycles," Research Technical Papers 15/RT/14, Central Bank of Ireland.

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