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The role of exchange rate in Mongolia: A shock absorber or a source of shocks?

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  • Doojav, Gan-Ochir

Abstract

The paper examines the role of exchange rate in Mongolia using a theoretical framework of a stochastic small open economy model. Based on a Structural Vector AutoRegression (SVAR) framework with zero long-run restrictions on quarterly data for the period 2000:Q1 to 2011:Q2, we highlight that real demand shock is the main source of business cycle and real exchange rate fluctuations. Furthermore, our analysis outlines that exchange rate acts as a shock absorber in the economy rather than a source of shocks. These results lend additional support to the macroeconomic policy of a flexible exchange rate for Mongolia. As a result, this implies the flexible exchange rate policy promotes monetary policy independence to control and stabilize inflation and output in Mongolia.

Suggested Citation

  • Doojav, Gan-Ochir, 2011. "The role of exchange rate in Mongolia: A shock absorber or a source of shocks?," MPRA Paper 72145, University Library of Munich, Germany, revised Nov 2011.
    • Handle: RePEc:pra:mprapa:72145
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    References listed on IDEAS

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    More about this item

    Keywords

    SVAR model; Open economy macroeconomics; business cycle; Mongolia;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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