Work detail

Exchange Rate Pass-Through Effect and Monetary Policy in Mongolia: Small Open Economy DSGE model

Author: Mgr. Oyu-Erdene Buyandelger
Year: 2014 - summer
Leaders: Ing. Aleš Maršál M.A.
Work type: Masters
Language: English
Pages: 90
Awards and prizes:
Abstract: This thesis analyzes the incomplete exchange rate pass-through effect on Mongolian economy and its
implication on monetary policy under foreign and domestic shocks. The analysis is carried out in a small
open economy New Keynesian DSGE model proposed by Monacelli (2005), where incomplete
exchange rate pass-through is introduced via nominal rigidities on import prices. In order to accomplish
the goal, we firstly derive the solutions of the model, calibrate the parameters, and finally simulate the
impulse responses. Moreover, SVAR estimation is achieved to estimate the pass-through. Four main
results are obtained. First, the exchange rate pass-through into import price and inflation is 0.69% and
0.49% respectively in short run, implying incomplete pass-through in Mongolia. Second, the exchange
rate acts as a shock absorber for domestic productivity and foreign demand shock, but as a shock
amplifier for domestic demand shock. Third, in case of incomplete pass-through the central bank of
Mongolia is required to adjust the nominal interest rate more under the productivity shock, but less for
the domestic and foreign demand shock. Finally, deviations from the law of one price contributes
considerably to the variability of the output gap under the low pass-through. Therefore, considering
incomplete pass-through in the conduct of monetary policy is significant to improve the effectiveness of
the monetary policy for the central Bank of Mongolia.




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