Exchange-Rate Modelling in the EPA World Economic Model



The aim of this paper is to report on our experience concerning the exchange-rate modelling in the EPA World Economic Model which is currently in the process of development at the Economic Planning Agency. The model is a multicountry model involving nine individual country models and a small regional block, which are linked together through a trade-linkage submodel and other channels of direct linkages. Section II of this paper will summarize the main features of this model. In Section III I shall first discuss some problems involved in endogenizing exchange rates in macroeconometric models, and then explain a particular approach to be used extensively in individual country modelling. It is based on a search method that determines the exchange rate which equilibrates the foreign exchange market in each period. Section IV then reports how this approach has worked out in our country models of Japan, the United States, West Germany, and the United Kingdom. It will also report on the Canadian and Australian models which adopt somewhat different approaches. Finally, in Section V, I shall discuss the differences in macroeconomic behaviour under alternative exchange-rate arrangements, based on simulation analyses of those models mentioned above. The discussion will reveal various important channels through which exchange-rate flexibility transmits the effects of exogenous and policy disturbances to the entire economy.


Exchange Rate Foreign Exchange Market Export Price Current Account Balance Fiscal Stimulus 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Amano, A. (1979) ‘FLEX 1: A Quarterly Model of the Japanese Flexible Exchange Rates System’, The Annals of the School of Business Administration, Kobe University, no. 23.Google Scholar
  2. Amano, A., A. Sadahiro and T. Sasaki (1981) ‘Structure and Application of the EPA World Economic Model’, Discussion Paper No. 22, Economic Planning Agency, August.Google Scholar
  3. Amano, A., A. Maruyama and M. Yoshitomi (1981) ‘A Three-Country Linkage Model’, EPA World Econometric Model Discussion Paper No. 10, Economic Planning Agency, September.Google Scholar
  4. Berner, R., P. Clark, E. Hernandez-Cati, H. Howe, S. Kwack and G. Stevens (1977) ‘A Multi-Country Model of International Influences on the U.S. Economy: Preliminary Results’, International Finance Discussion Paper No. 115, December.Google Scholar
  5. Bilson, J. F. 0. (1978) ‘The Monetary Approach to the Exchange Rate: Some Empirical Evidence’, IMF Staff Papers, vol. 25, no. 1, March, pp. 48–75.CrossRefGoogle Scholar
  6. Branson, W., H. Halttunen and P. Masson (1977) ‘Exchange Rates in the Short Run: The Dollar-Deutschemark Rate’, European Economic Review, vol. 10, no. 3, pp. 303–24.CrossRefGoogle Scholar
  7. Challen, D. W., V. W. Fitzgerald and T. Ike (1981) ‘Australia: Econometric Model for Short-term Prediction’, EPA World Econometric Model Discussion Paper No. 8, April.Google Scholar
  8. Dornbusch, R. (1979) ‘Monetary Policy under Exchange Rate Flexibility’, in Managed Exchange Rate Flexibility (Federal Reserve Bank of Boston, Conference vol. no. 20).CrossRefGoogle Scholar
  9. Haas, R. D. and W. E. Alexander (1979) ‘A Model of Exchange Rates and Capital Flows’, Journal of Money, Credit and Banking, vol. 11, no. 4, November, pp. 467–82.CrossRefGoogle Scholar
  10. Helliwell, J. F. (1979) ‘Policy Modeling of Foreign Exchange Rates’, Journal of Policy Modeling, vol. 1, no. 3, September.Google Scholar
  11. Hickman, B. G. and L. J. Lau (1973), ‘Elasticities of Substitution and Export Demands in A World Trade Model’, European Economic Review, vol. 4, December, pp. 347–80.CrossRefGoogle Scholar
  12. Isard, P. (1978) ‘Exchange-Rate Determination: A Survey of Popular Views and Recent Models’, Princeton Studies in International Finance, no. 42 (Princeton University).Google Scholar
  13. Longworth, D. (1980) ‘Canada: Financial and Capital Account Sectors’, EPA World Econometric Model Discussion Paper No. 4, November.Google Scholar
  14. Mussa, M. (1979) ‘Macroeconomic Interdependence and the Exchange Rate Regime’, in R. Dornbusch and J. Frenkel (eds), International Economic Policy: Theory and Evidence (Baltimore: The Johns Hopkins University Press).Google Scholar
  15. Sawyer, J. A., J. L. Carr, N. K. Choudhry, G. V. Jump, Y. R. Kotowitz and J. W. L. Winder (1976) ‘The TRACE Mark III R Annual Model of the Canadian Economy’, in J. L. Waelbroeck (ed.), The Models of Project LINK (Amsterdam: North-Holland Publishing Co.).Google Scholar
  16. Stevens, G. V. G., R. Berner, P. Clark, E. Hernandez-Catâ, P. Hooper, H. Howe, S. Y. Kwack and R. Tryon (1980) ‘Modeling Bilateral Exchange Rates in A Multi-Country Model’, in Proceedings of the Fourth Pacific Basin Central Bank Conference on Econometric Modeling (Tokyo: Bank of Japan).Google Scholar
  17. Urdang, E. S. (1978) ‘An International Flow of Funds Model with an Endogenous Exchange Rate’, mimeo, April.Google Scholar

Copyright information

© Paul De Grauwe and Theo Peeters 1983

Authors and Affiliations

There are no affiliations available

Personalised recommendations