A small open economy new Keynesian DSGE model for a foreign exchange constrained economy

Sisay Senbeta ()

Working Papers from University of Antwerp, Faculty of Business and Economics

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 response functions of the two models are the same qualitatively for most of the variables though the model with foreign exchange constraint generates more variability in most of the variables than the standard model. This behaviour of the model with foreign exchange constraint is consistent with the stylized facts of low income countries. Furthermore, for variables for which the two models have different impulse response functions, the model with foreign exchange constraint is both theoretically consistent and matches the stylized facts.

Keywords: New Keynesian DSGE; Foreign exchange constraint; Low income countries; Sub-Saharan Africa (search for similar items in EconPapers)
JEL-codes: E32 F31 F41 O55 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2011-05
New Economics Papers: this item is included in nep-afr, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:2011004

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