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Sources of exchange rate fluctuations: Are they real or nominal?

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  • Juvenal, Luciana

Abstract

I analyze the role of real and monetary shocks on exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 21% and 37% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 5 (September)
Pages: 849-876

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:5:p:849-876

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Exchange Rates Real Shocks Monetary Shocks Vector autoregression Sign restrictions;

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References

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Cited by:
  1. Dimitrios Malliaropulos & Ekaterini Panopoulou & Theologos Pantelidis & Nikitas Pittis, 2013. "Decomposing the persistence of real exchange rates," Empirical Economics, Springer, vol. 44(3), pages 1217-1242, June.
  2. Gehrke, Britta & Yao, Fang, 2013. "Sources of Real Exchange Rate Fluctuations: The Role of Supply Shocks Revisited," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79821, Verein für Socialpolitik / German Economic Association.
  3. Charles Engel, 2013. "Exchange Rates and Interest Parity," NBER Working Papers 19336, National Bureau of Economic Research, Inc.

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