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The State Space Model taking on Transformers

168 articles in 60 journals by 1,055 contributing authors Physical science of climate change, effects

Should monetary policy independence be maintained when the exchange rate is fixed under closed capital account conditions in a small open economy? In this study, we simulate the impossible trinity condition during 1989 to 2019 on the Nepalese economy that restricts capital flows and fixes the exchange rate with India. We modify the traditional Taylor rule based on the monetary policy reaction function to characterize Nepal's economic conditions more closely. The state–space model simulation shows that the policy trilemma does not hold in Nepal, such that the model can predict interest r...

Do interest rate differentials smoothly mirror the changes in the exchange rate between a small open economy and a large emerging market economy? The literature provides conflicting views on the validity of the uncovered interest parity condition (UIP), including its size and factors influencing the risk premium. We examine the validity of the UIP condition between Nepal and India using time-series data covering the period 1989 – 2019. A state space modelling approach based on the Kalman filter analysis is applied to simulate the risk premium. We find that the UIP condition does not hold for...