The exchange rate - A shock-absorber or source of shocks? A study of four open economies

The paper provides SVAR estimates for the UK, Canada, Sweden and Denmark, making explicit a monetary policy reaction function and taking account of exchange rate targeting practices. It examines the role of the exchange rate as shock-absorber as opposed to a source of its own, and destabilizing, shocks. We find that in all countries but the UK, real shocks are predominantly symmetric relative to the neighbor, implying little need for the exchange rate to act as shock-absorber. The shocks arising in the exchange market appear to have played a more important role in Denmark than in the other countries.