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The Role of the Exchange Rate as a Shock Absorber in a Small Open Economy

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  • Hilde Bjørnland

Abstract

This paper analyses interactions between the real exchange rate and business cycles in a small open economy like Norway. Using a structural vector autoregression model, the role of different shocks are analysed, to investigate to what extent the real exchange rate is absorbing shocks, or a source of shocks itself. The results are ambiguous. Output and the real exchange rate are mainly explained by separate shocks, so that relinquishing exchange rate independence should come at little cost. However, the importance of nominal shocks in the business cycle emphasises that stabilisation is possible. Hence, remaining monetary independence may be attractive. Copyright Kluwer Academic Publishers 2004

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  • Hilde Bjørnland, 2004. "The Role of the Exchange Rate as a Shock Absorber in a Small Open Economy," Open Economies Review, Springer, vol. 15(1), pages 23-43, January.
    • Handle: RePEc:kap:openec:v:15:y:2004:i:1:p:23-43
    DOI: 10.1023/B:OPEN.0000009423.30895.fe
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    5. Simeon Coleman & Juan Carlos Cuestas & Estefanía Mourelle, 2011. "Investigating the oil price-exchange rate nexus: Evidence from Africa," Working Papers 2011015, The University of Sheffield, Department of Economics, revised May 2011.
    6. S Coleman & J C Cuestas & E Mourelle, 2016. "Investigating the oil price-exchange rate nexus: evidence from Africa 1970-2004," Economic Issues Journal Articles, Economic Issues, vol. 21(2), pages 53-79, September.
    7. Nurmakhanova Mira, 2016. "Oil and Growth Challenge in Kazakhstan," EERC Working Paper Series 16/06e, EERC Research Network, Russia and CIS.
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    14. Korhonen, Iikka & Mehrotra, Aaron, 2009. "Real exchange rate, output and oil : case of four large energy producers," BOFIT Discussion Papers 6/2009, Bank of Finland, Institute for Economies in Transition.
    15. Alexius, Annika & Post, Erik, 2006. "Cointegration and the stabilizing role of exchange rates," Working Paper Series 2006:8, Uppsala University, Department of Economics.
    16. De, Kuhelika & Sun, Wei, 2020. "Is the exchange rate a shock absorber or a source of shocks? Evidence from the U.S," Economic Modelling, Elsevier, vol. 89(C), pages 1-9.
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