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Employment and Inflation Responses to an Exchange Rate Shock in a Calibrated Model

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  • Bermingham, Colin

    (Central Bank and Financial Services Authority of Ireland)

Abstract

Ireland has no ability to affect the exchange rate through interest rates since the adoption of the euro. This paper provides a theoretically transparent method for analysing the impact of an exchange rate shock on employment and inflation in this context. The split between the tradable and non-tradable sectors of the economy is highlighted. A small, calibrated model adapted from Barry (1997) is used in the paper. The equations in this paper are derived under less restrictive assumptions making the results more widely applicable. The parameters of the model can be changed easily to reflect the structure of the economy and to conduct scenario analyses. A practical application is provided using a specific calibration and set of assumptions and the sensitivity of the results to the calibrated parameters and assumptions is discussed.

Suggested Citation

  • Bermingham, Colin, 2005. "Employment and Inflation Responses to an Exchange Rate Shock in a Calibrated Model," Research Technical Papers 2/RT/05, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:2/rt/05
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    References listed on IDEAS

    as
    1. Baker, Terence J. & FitzGerald, John & Honohan, Patrick, 1996. "Economic Implications for Ireland of EMU," Research Series, Economic and Social Research Institute (ESRI), number PRS28.
    2. Amit Kara & Edward Nelson, 2003. "The Exchange Rate and Inflation in the UK," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 585-608, November.
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    4. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688, Elsevier.
    5. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July.
    6. Kenny, Geoff & McGettigan, Donal, 1996. "Exchange Rate Pass-Through and Irish Import Prices," Research Technical Papers 6/RT/96, Central Bank of Ireland.
    7. Eleanor Doyle, 2004. "Exchange rate pass-through in a small open economy: the Anglo-Irish case," Applied Economics, Taylor & Francis Journals, vol. 36(5), pages 443-455.
    8. Barry, F, 1997. "Dangers for Ireland of and EMU without the UK : Some Calibration Results," Papers 97/20, College Dublin, Department of Political Economy-.
    9. Slevin, Geraldine, 2003. "Structural Model Of Irish Inflation," Research Technical Papers 1/RT/03, Central Bank of Ireland.
    10. Bradley, John & Fitz Gerald, John & Kearney, Ide, 1993. "Modelling supply in an open economy using a restricted cost function," Economic Modelling, Elsevier, vol. 10(1), pages 11-21, January.
    11. Kenny, Geoff & McGettigan, Donal, 1996. "Non-Traded, Traded and Aggregate Inflation in Ireland: Further Evidence," Research Technical Papers 5/RT/96, Central Bank of Ireland.
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    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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