Is the Exchange Rate a Shock Absorber? the Case of Sweden

Alun Thomas

No 1997/176, IMF Working Papers from International Monetary Fund

Abstract: This paper uses a structural vector autoregression representation of the Mundell-Flemming model to analyze the determinants of movements in Sweden’s real exchange rate. It finds that, while (supply and demand) shocks account for over 60 percent of the forecast error variance, comparable to several Economic and Monetary Union (EMU) countries, demand shocks account for a higher fraction of these real shocks in Sweden than in those core countries. If real demand shocks result from controllable macroeconomic policies, the cost of relinquishing the exchange rate is no higher, and may be lower, for Sweden than for most core EMU countries.

Keywords: WP; exchange rate; demand shock; supply shock; nominal shock; Sweden demand shocks; single currency; core EMU country; forecast error variance decomposition; Phillips-perron test statistics; Real exchange rates; Supply shocks; Exchange rates; Government consumption; Real effective exchange rates (search for similar items in EconPapers)
Pages: 22
Date: 1997-12-01
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Citations: View citations in EconPapers (27)

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