Monetary shocks, exchange rates and trade balances: Evidence from inflation targeting countries
This paper investigates the relationship among monetary policy shocks, exchange rates and trade balances in five Inflation Targeting Countries (ITCs). The investigation is based on Structural Vector Error Correction Models (SVECMs) with long run and short run restrictions. The findings reveal that a contractionary monetary policy shock leads to a decrease in price level, a decrease in output, an appreciation in exchange rate, and an improvement in trade balance in the very short run. Our findings contradict the findings of price, output, exchange rate and trade puzzles that have been found in many empirical studies. Furthermore they are consistent with the theoretical expectations regarding the effect of a contractionary policy. The only long run restriction that we imposed on our models is that money does not affect real macroeconomic variables in the long run, which is consistent with both Keynesian and monetarist approaches.
Year of publication: |
2010
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Authors: | Ivrendi, Mehmet ; Guloglu, Bulent |
Published in: |
Economic Modelling. - Elsevier, ISSN 0264-9993. - Vol. 27.2010, 5, p. 1144-1155
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Publisher: |
Elsevier |
Keywords: | Monetary policy Inflation targeting Trade balance Exchange rate SVECM |
Saved in:
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