Munich Personal RePEc Archive

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

Doojav, Gan-Ochir (2011): The role of exchange rate in Mongolia: A shock absorber or a source of shocks?

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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.

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