Measuring and modeling the effects of G-3 exchange rate fluctuations on small open economies: A natural experiment

I present evidence that exchange rate fluctuations among the world's major currencies significantly affect the business cycles of small open economies. The impact of those fluctuations on any given country depends crucially on its exchange rate regime. The three Baltic countries in Central Europe constitute an interesting natural experiment in that regard. I estimate a structural vector autoregression (VAR) model to show the differential impact of euro-dollar exchange rate fluctuations on the business cycles of these three countries. Next, I build a dynamic sticky-price model and I calibrate it to the Baltic States in order to match and explain the empirical evidence.