DP2550 The Exchange Rate - A Shock-Absorber or Source of Shocks? A Study of Four Open Economies

Author(s): Michael J Artis, Michael Ehrmann
Publication Date: September 2000
Keyword(s): Canada, Denmark, EMU, Optimal Currency Area, Structural Vector Autoregression, Sweden, UK
JEL(s): C32, E42, F31, F33
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2550

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.