Is the Exchange Rate a Shock Absorber? the Case of Sweden

IMF Working Papers, December 1, 1997

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Is the Exchange Rate a Shock Absorber? the Case of Sweden

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Bibliographic details

• Authors: Alun H. Thomas
• Published: December 1, 1997
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451975499.001

Research question and approach

• Uses a structural vector autoregression representation of the Mundell-Flemming model to analyze the determinants of movements in Sweden’s real exchange rate.
• Focus on decomposing real exchange rate movements into supply shocks, demand shocks, and nominal shocks through forecast error variance decomposition.

Key findings

• Supply and demand shocks account for over 60 percent of the forecast error variance.
• Demand shocks account for a higher fraction of these real shocks in Sweden than in core EMU countries.
• If real demand shocks result from controllable macroeconomic policies, the cost of relinquishing the exchange rate is no higher, and may be lower, for Sweden than for most core EMU countries.

Policy implications

• The greater role of demand shocks in Sweden implies that macroeconomic policy design (to control demand shocks) is central to exchange rate considerations.
• Under the assumption that demand shocks are controllable by policy, adopting a single currency or relinquishing the exchange rate may not impose higher costs on Sweden relative to most core EMU countries—and could impose lower costs.

Subject areas and keywords (as provided)

• Subjects: Economic theory, Exchange rates, Foreign exchange, Government consumption, National accounts, Real effective exchange rates, Real exchange rates, Supply shocks
• Keywords: core EMU country, demand shock, exchange rate, Exchange rates, forecast error variance decomposition, Government consumption, nominal shock, Phillips-perron test statistics, Real effective exchange rates, Real exchange rates, single currency, supply shock, Supply shocks, Sweden demand shocks, WP

Publication metadata (as provided)

• Author: Alun H. Thomas
• Date: December 1, 1997
• Series: Working Paper No. 1997/176
• Issue: 176
• Volume: 1997
• Pages: 22
• DOI: https://doi.org/10.5089/9781451975499.001
• Stock No: WPIEA1761997
• ISBN: 9781451975499
• ISSN: 1018-5941

Source: IMF Working Papers — "Is the Exchange Rate a Shock Absorber? the Case of Sweden" by Alun H. Thomas, December 1, 1997.

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