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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. Jeffrey Sachs, 1985. "The Dollar and the Policy Mix: 1985," NBER Working Papers 1636, National Bureau of Economic Research, Inc.
    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. 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.).
    5. 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.).
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