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If the markka floated : simulating the BOF4 model with fixed and floating exchange rates

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  • Alpo Willman

    (Bank of Finland)

Abstract

In this paper the BOF4 model of the Bank of Finland, which is estimated in a fixed exchange rate regime, is transformed into a model with a floating exchange rate. In endogenizing the exchange rate two alternative assumptions about the formation of exchange rate expectations are used, i.e. static and market- specific (MS) rational expectations. We found that under static expectations the adjustment paths of the exchange rate were very volatile when shocks originated from the financial market. In response to real shocks, however, the results were not sensitive with respect to the alternative expectations formation schemes. In the case of MS-rational expectations the reactions of the exchange rate to real and financial shocks were, also somewhat greater than typically presented in the literature. In addition, the response paths were highly cyclical.

Suggested Citation

  • Alpo Willman, 1989. "If the markka floated : simulating the BOF4 model with fixed and floating exchange rates," Finnish Economic Papers, Finnish Economic Association, vol. 2(1), pages 3-19, Spring.
    • Handle: RePEc:fep:journl:v:2:y:1989:i:1:p:3-19
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    References listed on IDEAS

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    1. Minford, Patrick & Agenor, Pierre-Richard & Nowell, Eric, 1986. "A new classical econometric model of the world economy," Economic Modelling, Elsevier, vol. 3(3), pages 154-174, July.
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    4. Pauly, Peter & Petersen, Christian E., 1986. "Exchange rate responses in the LINK system," European Economic Review, Elsevier, vol. 30(1), pages 149-170, February.
    5. John B. Taylor, 1988. "Japanese Macroeconomic Policy and the Current Account Under Alternative International Monetary Regimes," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 6(1), pages 1-36, May.
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    8. Holtham, Gerald, 1986. "Exchange rates in the OECD INTERLINK model : Specification and simulation properties," European Economic Review, Elsevier, vol. 30(1), pages 199-235, February.
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    Cited by:

    1. Tarkka, Juha & Männistö, Hanna-Leena & Willman, Alpo, 1990. "Macroeconomic foundations and simulation properties of the BOF4 quarterly model of the Finnish economy," Research Discussion Papers 2/1990, Bank of Finland.
    2. Willman, Alpo & Kortelainen, Mika & Mannisto, Hanna-Leena & Tujula, Mika, 2000. "The BOF5 macroeconomic model of Finland, structure and dynamic microfoundations," Economic Modelling, Elsevier, vol. 17(2), pages 275-303, April.
    3. Esko Aurikko, 1989. "Rational exchange rate and price expectations under different exchange rate regimes in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 2(1), pages 20-30, Spring.
    4. repec:zbw:bofrdp:1990_005 is not listed on IDEAS
    5. Aurikko, Esko, 1990. "Floating exchange rates and capital mobility," Research Discussion Papers 5/1990, Bank of Finland.
    6. repec:zbw:bofrdp:1990_002 is not listed on IDEAS

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