Uncertainty in exchange rates leads to economic instability and volatility
The article explores how changes in exchange rates and output are influenced by various factors like monetary shocks, inflation, government spending, and trade balance in a small open economy. It shows that uncertainty in exchange rates and output is linked to uncertainty in these factors. The occurrence of certain shocks can either increase or decrease volatility in exchange rates and output. The impact of these factors on volatility is highly dependent on specific parameter values.