Norges Bank

Working Paper

Assessing estimates of the exchange rate pass-through

Ida Wolden Bache
Working Paper

This paper uses Monte Carlo techniques to address the question: are structural VAR estimates of exchange rate pass-through a useful tool to evaluate macroeconomic models of open economies? The data generating process is a small open economy DSGE model with incomplete pass-through. The results suggest that (i) the pass-through estimates obtained from a first-differenced VAR exhibit a systematic downward bias; (ii) by contrast, estimates derived from a low order vector equilibrium correction model are fairly accurate; but (iii) standard cointegration tests have low power to detect the cointegration relations implied by the DSGE model.

Norges Bank’s working papers present research projects and reports that are generally not in their final form. Other analyses by Norges Bank’s economists are also included in the series. The views and conclusions in these documents are those of the authors.

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ISSN 1502-8190 (online)

Published 23 December 2007 14:45
Published 23 December 2007 14:45