Tag Archives: Impulse responses

Exchange Rate Dynamics and Monetary Policy in a Small Open Economy: A Dsge Model (Published)

This paper compares alternative monetary policy rules in a small open economy that experiences internal shocks (productivity shocks) and external shocks to terms of trade and the foreign demand. A comparison of the volatility of the macroeconomic variables such as inflation, output, terms of trade, trade balance, investment and exchange rates under the different monetary rules is set to lead to the choice of the optimal exchange rate regime. I will show that these regimes can be ranked in terms of their implied volatility for the considered macroeconomic variables.  A two-country version of the Calvo sticky price model is used to analyze the macroeconomic implications of four alternative monetary policy regimes for a small open economy: domestic inflation targeting, managed float, CPI targeting and an exchange rate peg. The degree of exchange rate pass-through is very important for the assessment of monetary rules. I find that the CPI targeting rule is the best policy in an economy that exhibits lagged exchange rate pass-through. With low pass-through, both the domestic and the overall prices respond sluggishly to shocks, and it is more efficient for the monetary authority to target the overall CPI rather than just domestic prices. In a low pass-through environment, the policy maker can simultaneously strictly target (CPI) inflation, but still allow high volatility in the nominal exchange rate to stabilize the real economy in face of shocks. The low rate of pass-through ensures that exchange rate shocks do not destabilize the price level. An important feature of low pass-through is that it eliminates the trade-off between output volatility and inflation volatility in the comparison of fixed relative to floating exchange rates.

Keywords: DSGE Models, Exchange rate dynamics, Impulse responses, the law of one price deviations

STUDY OF THE DEGREE OF PERSISTENCE SHOCK’S ON THE VARIANCE AND THE DEGREE OF CONFIDENCE GIVEN BY THE INVESTORS TO THE DERIVATIVE PRODUCTS (Published)

We will study in our work, the persistence of the beneficial effect of the derivatives on the volatility and the efficiency of the French market. We will refer to the long term memory of FIGARCH type process as well as the breaking down of the anticipated variance of the volatility of the French stock market and the functions of impulse responses of different shocks of the derivatives. We deduced that the volatility is resistant in the market. We also noticed that the beneficial effect of these products is direct. This volatility disappears with the time because the impulse responses of these shocks are low and remaining inside the intervals of confidence and converging asymptotically towards the axis of abscissa. We will reveal in long term that the raise of volumes of transactions that is due to the concentration of the activities of investors on the derivative market is generating a big risk of volatilities in the French financial market. So, and despite the direct beneficial effects of these products on the volatility and the efficiency of the French financial market, it is become clear for the investors to reduce the total confidence granted on the increased use of these products which can lead in long term to the instability situations and of the persistence of the volatility in the financial markets.

Keywords: Impulse responses, VAR – FIGARCH, derivatives, intervals of confidence, persistence of volatility, transmissions of the chocks, volumes of transactions