publication . Preprint . 2014

Exchange rate and price dynamics in a small open economy - the role of the zero lower bound and monetary policy regimes

Gregor Bäurle; Daniel Kaufmann;
Open Access
  • Published: 01 Jan 2014
We analyse nominal exchange rate and price dynamics after risk premium shocks with short-term interest rates constrained by the zero lower bound (ZLB). In a small-open-economy DSGE model, temporary risk premium shocks lead to shifts of the exchange rate and the price level if a central bank implements an inflation target by means of a traditional Taylor rule. These shifts are strongly amplified and become more persistent once the ZLB is included in the model. We also provide empirical support for this finding. Using a Bayesian VAR for Switzerland, we find that responses of the exchange rate and the price level to a temporary risk premium shock are larger and mor...
free text keywords: Exchange rate and price dynamics, zero lower bound on short-term interest rates, small-open-economy DSGE model, monetary policy regimes, monetary transmission, Bayesian VAR, sign restrictions, jel:C11, jel:C32, jel:E31, jel:E37, jel:E52, jel:E58, jel:F31
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