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A small open economy new Keynesian DSGE model for a foreign exchange constrained economy

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  • SENBETA, Sisay Regassa

Abstract

Firms in many low income countries depend entirely on imported capital and intermediate inputs. As a result, in these countries economic activity is considerably influenced by the capacity of the economy to import these inputs which, in turn, depends on the availability and cost of foreign exchange. In this study we introduce foreign exchange availability as an additional constraint faced by firms into an otherwise standard small open economy New Keynesian DSGE model. The model is then calibrated for a typical Sub Saharan African economy and the behaviour of the model in response to both domestic and external shocks is compared with the standard model. The impulse response functions of the two models are the same qualitatively for most of the variables though the model with foreign exchange constraint generates more variability in most of the variables than the standard model. This behaviour of the model with foreign exchange constraint is consistent with the stylized facts of low income countries. Furthermore, for variables for which the two models have different impulse response functions, the model with foreign exchange constraint is both theoretically consistent and matches the stylized facts.

Suggested Citation

  • SENBETA, Sisay Regassa, 2011. "A small open economy new Keynesian DSGE model for a foreign exchange constrained economy," Working Papers 2011004, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2011004
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. A Small Open Economy New Keynesian DSGE model for a foreign exchange constrained economy
      by Christian Zimmermann in NEP-DGE blog on 2011-05-26 19:51:36

    Citations

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    Cited by:

    1. SENBETA, Sisay Regassa, 2013. "Informality and macroeconomic fluctuations: A small open economy New Keynesian DSGE model with dual labour markets," Working Papers 2013002, University of Antwerp, Faculty of Applied Economics.
    2. Senbeta, Sisay, 2011. "How applicable are the new keynesian DSGE models to a typical low-income economy?," MPRA Paper 30931, University Library of Munich, Germany.
    3. repec:cpn:umkdem:v:17:y:2017:p:97-114 is not listed on IDEAS

    More about this item

    Keywords

    New Keynesian DSGE; Foreign exchange constraint; Low income countries; Sub-Saharan Africa;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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