Analyzing the Effects of Flexible Exchange Rate Regime on the Malian Economy Using a Dynamic Stochastic General Equilibrium Model

Issaka Hamadi Maiga; Nafiu Lukman Abiodun; Thomas Mageto

doi:https://doi.org/10.14445/22315373/IJMTT-V67I12P502

International Journal of Mathematics Trends and Technology

Research Article | Open Access | Download PDF

Volume 67 | Issue 12 | Year 2021 | Article Id. IJMTT-V67I12P502 | DOI : https://doi.org/10.14445/22315373/IJMTT-V67I12P502

Analyzing the Effects of Flexible Exchange Rate Regime on the Malian Economy Using a Dynamic Stochastic General Equilibrium Model

Issaka Hamadi Maiga, Nafiu Lukman Abiodun, Thomas Mageto

Citation :

Issaka Hamadi Maiga, Nafiu Lukman Abiodun, Thomas Mageto, "Analyzing the Effects of Flexible Exchange Rate Regime on the Malian Economy Using a Dynamic Stochastic General Equilibrium Model," International Journal of Mathematics Trends and Technology (IJMTT), vol. 67, no. 12, pp. 9-20, 2021. Crossref, https://doi.org/10.14445/22315373/IJMTT-V67I12P502

Abstract

This paper investigates the possibility to analyse the effects of flexible exchange rate regime on the Malian economy using a Dynamic Stochastic General Equilibrium (DSGE) model. The model includes 22 equations estimated by log-likelihood estimation technique using data from the variables consumption, production, consumer price index, exportation, importation, money supply, exchange rate, domestic interest rate, gross domestic products, and world interest rate observed chronologically for the period 1970-2020. The results show that household consumption is more affected negatively under fixed exchange rate regime when there occurs a shock of world interest rate. For instance, one-unit shock to world interest rate reduces household consumption by an estimated 0.52 when the exchange rate regime is set to be fixed and by an estimated 0.01 when it is flexible. Production is more affected positively under fixed exchange rate regime in response to the shocks. For instance, a 1% increase of trade terms, raises the production by 0.02% under fixed exchange rate regime and by only 0.003% under flexible exchange rate regime. In terms of fluctuations, results show that all the variables fluctuate more under flexible exchange rate regime for all types of shocks compared to fixed exchange rate regime.

Keywords

DSGE, flexible exchange rate regime, fixed exchange rate regime, fluctuations, shocks

References

[1] Burriel, P., Checherita-Westphal, C., Jacquinot, P. S., & Stahler, N. Economic consequences of high public debt: Evidence from three large scale dsge models. European Central Bank (ECB), Frankfurt a. M.,(ECB Working Paper, No. 2450, ISBN 978-92-899-4365-9,) (2020) 1-32.
[2] Devereux, M. B. Politique montaire, flexibilité du taux de change et transmission des variations du taux de change. Banque du Canada , (2010) 51-94.
[3] Diop, M. B. Un modèle de prévision de l'inflation à moyen terme dans L’UEMOA: une approche DSGE. Document de Travail N° DT/11/03/2011, (2011) 1-37.
[4] Federico, S. M. Monetary and exchange rate policyunder remittance . Federal Reserve Bank of Atlanta,Reserach Department, (2011) 1-47.
[5] Frank, S., & Wouters, R.. An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association, (2003) 1123-1175.
[6] Hang, X., Yimeng, Z., & Yunchan, Z. Covid-19 pandemic, sustainability of macroeconomy, and choice of monetary policy targets: A nk-dsge analysis based on china. Sustainability 2021, 13, 3362 (https://doi.org/10.3390/su13063362) (2021) 1-20.
[7] Khalafalla, A. M. Does the dsge model fit the Sudaneconomic data ? Journal of Applied Economics and Business, (2020) 5-17.
[8] Lawrence, C., Martin, E., & Charles, E. Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, (2005) 1-45.
[9] Lorenzo, T.-M. Politique monétaire, taux d'inflation de long terme et indétermination dans un model Néo-Keynésien avec rigidité des salaires et des prix. Université du Quebec à Monréal, (2017) 1-115.
[10] Michael, B. D., Philip R., L., & Juanyi, X. Exchange rates and monetary policy in emerging market economy. IIIS Discussion Paper, (2004) 1-59.
[11] Mutiu, R. G. A bayesian estimation of dsge model for the nigerian economy. Euro Economica, (2017) 145-158.
[12] Naoyuki, Y., & Tamon, A. Optimal dynamic path during the transition of exchange rate regime: analysis of the peoples republic of china, malaysia, and singapore. ADBI Working Paper 765. Tokyo: Asian Development Bank Institute., (2017) 1-26.
[13] NOEL, B. B. Les modèles d'equilibre général stochastiques comme outils de prévision macroéconomique, une approche bayésienne, le cas du canada. Université du Quebec à Monréal, (2019) 1-79.
[14] Oyono, D. E. Effets réels des régimes de change dans les pays en développement. L'Actualité économique, 82(3) (2006) 319-340.
[15] Phuong, N. V. Evaluating the forecasting accuracy of the closed- and open economy new keynesian dsge models. Centre pour la Recherche Economique et ses Applications, (2020) 1-59.
[16] Sisay, R. S. A Small Open Economy New Keynesian DSGE model for a foreign exchange constrained economy. Munich Personal RePEc Archive, (2011) 1-42.
[17] Stephanie, S.-G., & Uribe, M. Optimal simple and implementable monetary and fiscal rules. Natinal bureau of economic research, Working Paper 10253, (2004) 1-51.
[18] Uhlig, H. A Toolkit for Analysing Nonlinear Dynamic Stochastic Models Easily. Center for University of Tilburg and CEPR, (1998) 1-23.
[19] Umba, B. G. Choc externes et activité économique en rd congo : une analyse en équilibre général dynamique et stochastique (dsge). Centre pour la Recherche Economique et ses Applications, (2020) 1-40.
[20] Vronique, S., & Agns, B.-Q. A case for intermediate exchange-rate regimes. Centre d'Etudes Prospectives et d'Informations Internationales, (2010) 1-48.