WP 38/2006: Identifying monetary policy in a small open economy under fixed exchange rates
We demonstrate how to identify monetary policy under fixed exchange rates in astructural vector autoregression (SVAR) using Denmark as a case study. The identifyingrestrictions are compared to SVARs for flexible exchange-rate regimes. Our basicmodel generates a plausible central-bank reaction function, and the responses to monetaryshocks are in accordance with theory. We extend the basic model and econometricapproach to incorporate the central bank’s interventions on the foreign-exchange market.