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Assessing estimates of the exchange rate pass-through

Author

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  • Ida Wolden Bache

    (Norges Bank (Central Bank of Norway))

Abstract
This paper uses Monte Carlo techniques to address the question: are structural VAR estimates of exchange rate pass-through a useful tool to evaluate macroeconomic models of open economies? The data generating process is a small open economy DSGE model with incomplete pass-through. The results suggest that (i) the pass-through estimates obtained from a first-differenced VAR exhibit a systematic downward bias; (ii) by contrast, estimates derived from a low order vector equilibrium correction model are fairly accurate; but (iii) standard cointegration tests have low power to detect the cointegration relations implied by the DSGE model.

Suggested Citation

  • Ida Wolden Bache, 2008. "Assessing estimates of the exchange rate pass-through," Working Paper 2007/12, Norges Bank.
    • Handle: RePEc:bno:worpap:2007_12
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    File URL: https://www.norges-bank.no/en/news-events/news-publications/Papers/Working-Papers/2007/WP-200712/
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    More about this item

    Keywords

    Exchange rate pass-through; structural VAR; DSGE models; cointegration;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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