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

_IMF Working Papers, December 1, 1997_

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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

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/is-the-exchange-rate-a-shock-absorber-the-case-of-sweden-2450_