Simulating exchange rate shocks in the MPS and MCM models: an evaluation

Arnold Kling

No 260, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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.

Date: 1985
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