What Drives Business Cycles in a Small Open Economy with a Fixed Exchange Rate?

Niels Dam () and Jesper Gregers Linaa

No 05-02, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: We decompose the Danish business cycle into ten structural shocks using an open-economy DSGE model with infrequent determination of prices and wages which we estimate with Bayesian techniques. Consistent with the Danish monetary policy regime, we formulate an imperfect peg on the foreign exchange rate and analyse the resulting monetary transmission mechanism. We find that the Danish business cycle is dominated by stochastic movements in the labour supply in the long term, while demand shocks play a major role in the short term. Remarkably, the role of technology is negligible, and foreign factors only contribute little to the Danish business cycle, especially in the long term. With respect to the estimation, we generally find believable estimates although the degree of price stickiness is remarkably high.

Keywords: open economy; peg; business cycles; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E3 E4 F4 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2005-03
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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