| The first chapter aims to quantify and compare the reaction of prices and output to exchange rate shocks among six industrialized countries (Australia, Japan, Germany, The UK, The US and Canada) by exploiting the data's time series properties with identified, structural vector auto-regressions. In agreement with previous research on exchange rate pass-through to domestic prices, it is found that US prices are least affected by the exchange rate after two years. Chapter two evaluate the performance of various central bank targeting schemes to exogenous shocks. Although this topic is not entirely new, the approach taken here is innovative in a number of ways. An intertemporal general equilibrium, small open economy model is formulated that captures a number of stylized facts about the international economy. The simple discrete time setup allows for analytical solutions of the model and comparison of steady states across policies. In accordance with existing literature, nominal income targeting successfully reduces real consumption volatility given exogenous shocks, whereas fixing the exchange rate has a low sacrifice ratio when stabilizing prices. The goal of chapter 3 is to empirically test the theoretical model presented in the previous chapter. A vector autoregressive moving-average representation is employed that uses the theoretical model's key equations as identifying restrictions. Nominal consumption targeting is found to be the most robust policy to exogenous shocks in a medium sized economy such as Canada. |
