Title
Foreign exchange constraints and macroeconomic dynamics in a small open economy Foreign exchange constraints and macroeconomic dynamics in a small open economy
Author
Faculty/Department
Faculty of Applied Economics
Publication type
report
Publication
Antwerp :Universiteit Antwerpen, Faculty of Applied Economics, [*]
Subject
Economics
Source (series)
Research paper / University of Antwerp, Faculty of Applied Economics ; 2013:023
Volume/pages
61 p.,
Carrier
E
Target language
English (eng)
Affiliation
University of Antwerp
Abstract
Firms in most low-income countries depend almost entirely on imported capital and intermediate inputs. As a result, the availability and cost of foreign exchange play a crucial role on the macroeconomic performance of these countries. In this study we introduce foreign exchange constraints that importing …rms face and the foreign exchange reserve management problem of the central banks in such economies into a small open economy New Keynesian model. We calibrated the model to the Ethiopian economy. Our simulation experiments show that given the foreign exchange constraints and the standard monetary policy rule, contractionary monetary policy leads to expansion in output and consumption and contraction in employment. This e¤ect is more pronounced if the duration of price stickiness for the imported goods is short relative to that of the domestically produced goods which seems to be the case for countries like Ethiopia. This result, to the minimum, reminds us that one needs to be cautious about the e¤ectiveness of conventional macroeconomic policies when applied to low-income countries.
Full text (open access)
https://repository.uantwerpen.be/docman/irua/af16e4/e5042642.pdf
Handle