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

Author

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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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    File URL: http://www.esr.ie/Vol37_1/02_Birmingham_article.pdf
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    References listed on IDEAS

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    1. Baker, Terence J. & FitzGerald, John & Honohan, Patrick, 1996. "Economic Implications for Ireland of EMU," Research Series, Economic and Social Research Institute (ESRI), number PRS28.
    2. Amit Kara & Edward Nelson, 2003. "The Exchange Rate and Inflation in the UK," Scottish Journal of Political Economy, Scottish Economic Society, pages 585-608.
    3. Amit Kara & Edward Nelson, 2003. "The Exchange Rate and Inflation in the UK," Scottish Journal of Political Economy, Scottish Economic Society, pages 585-608.
    4. Kenny, Geoff & McGettigan, Donal, 1996. "Exchange Rate Pass-Through and Irish Import Prices," Research Technical Papers 6/RT/96, Central Bank of Ireland.
    5. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
    6. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 243, European Central Bank.
    7. Anderton, Robert, 2003. "Extra-euro area manufacturing import prices and exchange rate pass-through," Working Paper Series 219, European Central Bank.
    8. Barry, F, 1997. "Dangers for Ireland of and EMU without the UK : Some Calibration Results," Papers 97/20, College Dublin, Department of Political Economy-.
    9. 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.
    10. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, pages 913-940.
    11. Slevin, Geraldine, 2003. "Structural Model Of Irish Inflation," Research Technical Papers 1/RT/03, Central Bank of Ireland.
    12. Bradley, John & Fitz Gerald, John & Kearney, Ide, 1993. "Modelling supply in an open economy using a restricted cost function," Economic Modelling, Elsevier, vol. 10(1), pages 11-21, January.
    13. 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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    Cited by:

    1. repec:eso:journl:v:47:y:2016:i:1:p:1-31 is not listed on IDEAS
    2. Clancy, Daragh & Merola, Rossana, 2014. "The effect of macroprudential policy on endogenous credit cycles," Research Technical Papers 15/RT/14, Central Bank of Ireland.
    3. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, pages 332-351.
    4. Jacquinot, Pascal & Clancy, Daragh & Lozej, Matija, 2014. "The effects of government spending in a small open economy within a monetary union," Working Paper Series 1727, European Central Bank.

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