Working Papers present research work by both Danmarks Nationalbank’s employees and our partners. Working Papers are primarily targeted at professionals and people with an interest in central banking research as well as economics and finance in a broader sense.

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.