Abstract
This paper analyses the impact of temporary monetary shocks and permanent productivity shocks on the exchange rate and current account in Jamaica, Argentina, Bolivia, Chile, Columbia, Costa Rica, Mexico, Paraguay and Peru following the technique by Lee and Chinn [1] who analysed the same for the G7 countries. Our findings indicate that during the period 2005-2014, permanent productivity shocks have a greater long term effect on the real exchange rate, but relatively little effect on the current account, while temporary shocks have greater effect on the current account and exchange rate in the short run, but not on either variable in the long run. The same results as in Lee and Chinn [1] for the G7 countries except the US hold for Argentina, Bolivia, Chile, Columbia, Costa Rica, Jamaica, Mexico, Paraguay and Peru. The results are also consistent with the sticky price model of Obstfeld and Rogoff [2]. Lee and Chinn [1] postulate that, the greater impact of a permanent productivity shock in the US economy may be due to a substantial swing in the US foreign currency policy relative to other G7 countries. The stronger impact of temporary shocks on the current account in the Caribbean and Latin American Countries as well as in the other G7 countries may be attributed to nominal price movements that alter the relative price structure between countries. The latter results, display no significant pricing to market effect resulting from exchange rate overshooting caused from a monetary shock.
Highlights
This paper analyses the impact of temporary monetary shocks and permanent productivity shocks on the exchange rate and current account in Jamaica, Argentina, Bolivia, Chile, Columbia, Costa Rica, Mexico, Paraguay and Peru following the technique by Lee and Chinn [1] who analysed the same for the G7 countries
This paper analyses the impact of temporary monetary shocks and permanent productivity shocks on the real effective exchange rate (REER) and the current account in selected Caribbean and Latin American countries; Jamaica, Argentina, Bolivia, Chile, Costa Rica, Mexico, Paraguay and Peru using quarterly data from 2005Q1 to 2014Q4
The results show that permanent shocks interpreted as a positive shock to productivity improve the REER and worsens the current account for Jamaica, Argentina, Bolivia, Chile, Mexico, Paraguay and Peru
Summary
Empirical analyses of the impact of temporary and permanent shocks on the real effec-. While the REER for Bolivia, Columbia, Costa Rica, Paraguay and Peru were the lower than the others but appeared to be meandering upwards showing signs of depreciation They all remained relatively stable just up to the Global Financial Crisis of 2008, where there is a significant declining shock (appreciation) of the REER for all the countries in the Sample followed by a small sharp upturn (depreciation) in 2009, see panel B on Figure 1. The Bank of Jamaica has allowed the market to predominantly determine the value of its currency, by practicing less sterilization policies As it relates to the Latin American countries, the current account as a percentage of GDP for Costa Rica and Columbia averaged below zero.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
