The role of the exchange rate in a new Keynesian DSGE model for the South African economy
Date
2010
Authors
Alpanda S.
Kotze K.
Woglom G.
Journal Title
Journal ISSN
Volume Title
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Abstract
We build a small open economy New Keynesian dynamic stochastic general equilibrium model for South Africa similar to Steinbach et al. We abandon their assumption of complete risk sharing with the foreign economy, and introduce country risk shocks to allow deviations from uncovered interest rate parity. These changes allow us to include the exchange rate as an observable variable in the estimation of the model. Using forecast error variance decompositions and historical decompositions, we show that country risk shocks have sizable effects on the South African business cycle. We also explore the optimal monetary policy implications of our model within the context of Taylor rules. © 2010 Economic Society of South Africa.
Description
Keywords
Bayesian analysis, business cycle, economic conditions, estimation method, exchange rate, interest rate, Keynesian theory, monetary policy, numerical model, South Africa
Citation
South African Journal of Economics
78
2
78
2