Exchange rate volatility and the time-varying effects of aggregate shocks
AbstractThis paper investigates the dynamics of the real exchange rate and relative output among the US and five of its top six trading partners since the collapse of Bretton Woods. It employs long-run restrictions to identify the usual suspect macroeconomic shocks and their relative importance for exchange rate fluctuations. An improvement of the econometric application is that it allows for the contribution of each shock to the real exchange rate and relative output to vary over time. While the volatility of US output – both total and relative to that of the UK or Canada – is estimated to have substantially reduced since the mid-1980s, consistent with the Great Moderation findings of many others, the volatility of real exchange rates has experienced a gradual and continuous increase over the same period. Monetary shocks account for only a small fraction of these dynamics, although they do track well the increase in volatility of US output during the Great Inflation period. It is supply-type shocks that seem to be more important for the relative output volatility reductions of the mid-1980s. Conversely, demand shocks seem to account for the largest portion of the volatility increases in the real exchange rate. Perhaps unsurprisingly, both volatilities increase during the 2007 financial crisis and the ensuing 2008–2009 Great Recession – periods associated with higher economic uncertainty.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 32 (2013)
Issue (Month): C ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/30443
Bretton Woods; The Great Moderation; Stochastic volatility; Real exchange rates; Markov chain Monte Carlo; Structural vector autoregressions;
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.