Working Paper: CEPR ID: DP2550
Authors: Michael J. Artis; Michael Ehrmann
Abstract: The paper provides SVAR estimates for four open economies: the UK, Canada, Sweden and Denmark, making explicit a monetary policy reaction function and taking account of exchange rate targeting practices. The object of the analysis is to examine the idea that an independent money and exchange rate should allow for effective shock-absorption. A polar extreme would be that exchange markets breed their own, and destabilizing, shocks. The paper?s findings vary from one economy to another: monetary union appears easy to recommend for Sweden and Denmark, much less so for Canada and the UK.
Keywords: Canada; Denmark; EMU; Optimal Currency Area; Structural Vector Autoregression; Sweden; UK
JEL Codes: C32; E42; F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| independent exchange rate (F31) | stabilize against idiosyncratic shocks (E32) |
| nominal shocks (E39) | exchange rate variability (F31) |
| exchange rate does not play a significant role as a shock absorber (F31) | Canada, Denmark, Sweden (O51) |
| exchange rate fluctuations (F31) | output distortions (H31) |
| monetary union appears beneficial (F36) | Sweden and Denmark (O52) |
| monetary policy (E52) | output stabilization (E63) |