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The Exchange Rate -a Shock-Absorber or Source of Shocks? A Study of Four Open Economies

  • Michael Artis
  • Michael Ehrmann

The paper provides SVAR estimates for four open economies: the UK, Canada, Sweden and Denmark, making explicit a monetary policy reaction function and taking account of exchange rate targeting practices. The object of the analysis is to examine the idea that an independent money and exchange rate should allow for effective shock-absorption. A polar extreme would be that exchange markets breed their own, and destabilizing, shocks. The paper’s findings vary from one economy to another: monetary union appears easy to recommend for Sweden and Denmark, much less so for Canada and the UK.

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Paper provided by European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS) in its series EUI-RSCAS Working Papers with number 38.

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Date of creation: 15 Sep 2000
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Handle: RePEc:erp:euirsc:p0033
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  13. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
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  19. Michael Ehrmann, 2000. "Comparing monetary policy transmission across European countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(1), pages 58-83, March.
  20. Artis, Michael & Ehrmann, Michael, 2006. "The exchange rate - A shock-absorber or source of shocks? A study of four open economies," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 874-893, October.
  21. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  22. Alun H. Thomas, 1997. "Is the Exchange Rate a Shock Absorber? the Case of Sweden," IMF Working Papers 97/176, International Monetary Fund.
  23. Vittorio Grilli & Nouriel Roubini, 1995. "Liquidity and Exchange Rates: Puzzling Evidence from the G-7 Countries," Working Papers 95-17, New York University, Leonard N. Stern School of Business, Department of Economics.
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  25. Buiter, Willem H, 2000. "Optimal Currency Areas: Scottish Economic Society/Royal Bank of Scotland Annual Lecture, 1999," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(3), pages 213-50, August.
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