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Advantages of Fixed Exchange Rate Regime from a General Equilibrium Perspective

Viktors Ajevskis () and Kristine Vitola

No 2009/04, Working Papers from Latvijas Banka

Abstract: In this paper we estimate a small open economy DSGE model for Latvia following Lubik and Schorfheide (2007) using Bayesian methods. The estimates of the structural parameters fall within plausible ranges. Simulation results suggest that under inflation targeting inflation turns out to be more volatile than under the peg in the case of Latvia. Additional concern for output stabilisation accounts for lower inflation variability while it is still higher than under existing exchange rate regime with ±1% fluctuation bands. The model results therefore support the existing exchange rate policy.

Keywords: DSGE; small open economy; exchange rate policy; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C3 C51 D58 E58 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-dge, nep-ifn, nep-mon and nep-opm
Date: 2009-11-25
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https://www.macroeconomics.lv/sites/default/files/wp_2009-4_ajevskis-vitola.pdf (application/pdf)

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