Open Economy Dynamics in a Floating Exchange Rate Developing Country Context |
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Authors: | David Hudgins Patrick Matthew Crowley |
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Institution: | 1. Department of Decision Sciences and Economics, College of Business, Texas A&2. M University–Corpus Christi, Corpus Christi, Texas, USAdavid.hudgins@tamucc.edu;4. M University–Corpus Christi, Corpus Christi, Texas, USA |
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Abstract: | ABSTRACTThis article develops a wavelet-based control model to simulate fiscal, monetary, and real exchange rate scenarios in an open economy developing country with an inflation-targeting regime. We use South African macro data to jointly simulate optimal fiscal and monetary policy under varying scenarios for real exchange rate stability with interest rate parity. As real exchange rate stability increases, the model simulates the effects on the trade balance under both a constant and depreciating real exchange rate. We find that short-term cycle stability problems are somewhat mitigated by allowing the real exchange rate to depreciate. |
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Keywords: | Discrete wavelet analysis exchange rate fiscal policy monetary policy optimal control South Africa |
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