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.

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References

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