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Simulating exchange rate shocks in the MPS and MCM models : an evaluation

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  • Arnold Kling

Abstract

In 1983 and 1984, the United States economy staged a vigorous economic recovery at a time when the value of the dollar was high and rising, leading to a steady deterioration of the trade balance. The strength of both the economy and the dollar exceeded most forecasts. This raises a question: are there expansionary effects from a currency appreciation that are overlooked when we focus solely on the trade balance? ; The purpose of this paper is to try and resolve the issue of whether or not an appreciation of the dollar is expansionary. To do so, I evaluate the simulation properties of the MPS and MCM models. As part of this evaluation, I develop a \"back-of-the-envelope\" model to serve as a third alternative against which to compare the two large econometric models.

Suggested Citation

  • Arnold Kling, 1985. "Simulating exchange rate shocks in the MPS and MCM models : an evaluation," International Finance Discussion Papers 260, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:260
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    References listed on IDEAS

    as
    1. Jeffrey D. Sachs, 1985. "The Dollar and the Policy Mix: 1985," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 117-197.
    2. Peter Hooper, 1984. "International repercussions of the U.S. budget deficit," International Finance Discussion Papers 246, Board of Governors of the Federal Reserve System (U.S.).
    3. Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
    4. Jeffrey Sachs, 1985. "The Dollar and the Policy Mix: 1985," NBER Working Papers 1636, National Bureau of Economic Research, Inc.
    5. James E. Glassman, 1985. "The influence of exchange rate movements on inflation in the United States," Working Paper Series / Economic Activity Section 46, Board of Governors of the Federal Reserve System (U.S.).
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