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Exchange Rates and Asymmetric Shocks in Small Open Economies

Author

Listed:
  • Alexius, Annika

    (Department of Economics)

  • Post, Erik

    () (Department of Economics)

Abstract

If floating exchange rates stabilize shocks rather than create shocks, a country that joins a monetary union or fixes its exchange rate looses a stabilizing mechanism. We use a first difference structural VAR on trade weighted macroeconomic data to study the role of floating exchange rates for five "small open economies" with inflation targets. By including both domestic and foreign variables and using a combination of long and short-run restrictions, we identify asymmetric shocks more carefully than previous studies. Only in Sweden and Canada does the nominal exchange rate appreciate significantly in response to asymmetric demand shocks and depreciate to asymmetric supply shocks. Most exchange rate movements are caused by speculation and are not responses to fundamental shocks. However, these exchange rate shocks have negligible effects on output and inflation. Our findings indicate that exchange rates are neither stabilizing nor destabilizing but may be loosely characterized as disconnected from the rest of the economy.

Suggested Citation

  • Alexius, Annika & Post, Erik, 2005. "Exchange Rates and Asymmetric Shocks in Small Open Economies," Working Paper Series 2005:10, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uunewp:2005_010
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    References listed on IDEAS

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    Cited by:

    1. Per Engstrom & Bertil Holmlund, 2009. "Tax evasion and self-employment in a high-tax country: evidence from Sweden," Applied Economics, Taylor & Francis Journals, vol. 41(19), pages 2419-2430.
    2. Lian An & Yoonbai Kim, 2010. "Sources of Exchange Rate Movements in Japan: Is the Exchange Rate a Shock-Absorber or a Source of Shock?," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 265-276, May.
    3. Jie Chen, 2006. "The Dynamics of Housing Allowance Claims in Sweden: A Discrete Time-Hazard Analysis," European Journal of Housing Policy, Taylor and Francis Journals, vol. 6(1), pages 1-29, April.
    4. Camelia Milea & Adina Criste, 2014. "An Assessment Of The Effects Of The Currency Regime Change Shock On The External Equilibrium Of Some New European Union Member States," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 103-107, February.
    5. Hallberg, Daniel, 2006. "Cross-national differences in income poverty among Europe´s 50+," Working Paper Series 2006:14, Uppsala University, Department of Economics.
    6. Alexius, Annika & Post, Erik, 2006. "Cointegration and the stabilizing role of exchange rates," Working Paper Series 2006:8, Uppsala University, Department of Economics.
    7. Katerina Arnostova & Oxana Babecka Kucharcukova & Jan Babecky & Vojtech Belling & Sona Benecka & Jan Bruha & Martin Gurtler & Tomas Holub & Eva Hromadkova & Lubos Komarek & Zlatuse Komarkova & Petr Kr, 2016. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2016," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number as16 edited by Katerina Arnostova & Lucie Matejkova.
    8. Erixon, Lennart, 2016. "Building a path of equality to economic progress and macroeconomic stability - the economic theory of the Swedish model," Research Papers in Economics 2016:3, Stockholm University, Department of Economics.
    9. Hilde C. Bjørnland, 2008. "Monetary Policy and Exchange Rate Interactions in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 197-221, March.
    10. Berg, Lennart & Berger, Tommy, 2005. "The Q theory and the Swedish housing market –an empirical test," Working Paper Series 2005:19, Uppsala University, Department of Economics.
    11. Annika Alexius & Erik Post, 2008. "Exchange rates and asymmetric shocks in small open economies," Empirical Economics, Springer, vol. 35(3), pages 527-541, November.
    12. repec:cnb:ocpubv:as17 is not listed on IDEAS
    13. Rajmund Mirdala, 2016. "Exchange Rate Pass-Through to Domestic Prices in the European Transition Economies," Working Papers 361, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    14. Lennart Erixon, 2015. "Can fiscal austerity be expansionary in present-day Europe? The lessons from Sweden," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(4), pages 567—601-5, October.
    15. Rajmund Mirdala, 2015. "Sources of Real Exchange Rate Fluctuations in New EU Member Countries," FIW Working Paper series 160, FIW.

    More about this item

    Keywords

    Exchange rates; asymmetric shocks; structural VAR;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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