August 1985

Simulating Exchange Rate Shocks in the MPS and MCM Models: An Evaluation

Arnold S. Kling


In 1983 and 1984, the United States economy staged a vigorous economic recovery at a time when the value of the dollar was high and rising, leading to a steady deterioration of the trade balance. The strength of both the economy and the dollar exceeded most forecasts. This raises a question: are there expansionary effects from a currency appreciation that are overlooked when we focus solely on the trade balance?

The purpose of this paper is to try and resolve the issue of whether or not an appreciation of the dollar is expansionary. To do so, I evaluate the simulation properties of the MPS and MCM models. As part of this evaluation, I develop a "back-of-the-envelope" model to serve as a third alternative against which to compare the two large econometric models.

PDF: Full Paper

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