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A small open economy New Keynesian model for a foreign exchange constrained economy

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  • Senbeta, Sisay

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 responses of the two models show that the modified model generates more variability in most of the variables considered than the standard model. This behaviour of the modified model seems to correspond to the stylized facts of low income countries.

Suggested Citation

  • Senbeta, Sisay, 2011. "A small open economy New Keynesian model for a foreign exchange constrained economy," MPRA Paper 29996, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:29996
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    References listed on IDEAS

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    Cited by:

    1. repec:cpn:umkdem:v:17:y:2017:p:97-114 is not listed on IDEAS
    2. Lahcen, Mohammed Ait, 2014. "DSGE models for developing economies: an application to Morocco," MPRA Paper 63404, University Library of Munich, Germany.
    3. 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.

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

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