Arbeitspapier
How important are the international financial market imperfections for the foreign exchange rate dynamics: A study of the sterling exchange rate
The UK has been a net debtor over the past two decades and the sterling exchange rates are sensitive to any chaos that might occur in the Financial market. This paper examines the importance of the inter-national financial imperfections in the sterling exchange rate dynamics. We build a small open economy DSGE model with the constrained international financial institutions that intermediate capital flows, and derive tractable analytical solutions. The constraint works to introduce a wedge between lending and borrowing rates, which compensates financiers for their currency risk-taking. The model has been estimated by using a simulation-based Indirect Inference approach, which provides a natural framework for testing the hypothesis implied by the model. We find that the model cannot be rejected by the UK data. Shocks to financial forces are the main driving forces behind the large and sudden depreciation of the Sterling exchange rates in the aftermath of the collapse of Lehman Brothers and the Brexit vote. Furthermore, the optimal policy rules have been proposed.
- Language
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Englisch
- Bibliographic citation
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Series: Cardiff Economics Working Papers ; No. E2018/11
- Classification
-
Wirtschaft
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Foreign Exchange
International Lending and Debt Problems
Open Economy Macroeconomics
Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation: Models and Applications
- Subject
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Small open economy DSGE model
International financial imperfections
Sterling exchange rates
Indirect Inference
Crisis
Policy rules
- Event
-
Geistige Schöpfung
- (who)
-
Dong, Xue
Minford, Patrick
Meenagh, David
- Event
-
Veröffentlichung
- (who)
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Cardiff University, Cardiff Business School
- (where)
-
Cardiff
- (when)
-
2018
- Handle
- Last update
-
10.03.2025, 11:45 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Dong, Xue
- Minford, Patrick
- Meenagh, David
- Cardiff University, Cardiff Business School
Time of origin
- 2018
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