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Time-varying dynamics of the real exchange rate. A structural VAR analysis

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  • Mumtaz, Haroon

    ()
    (Bank of England)

  • Sunder-Plassmann, Laura

    ()
    (University of Minnesota)

Abstract

The aim of this paper is to explore the evolution of real exchange rate dynamics over time. We use a time-varying structural vector autoregression to investigate the role of demand, supply and nominal shocks and consider their impact on, and contribution to fluctuations in, the real exchange rate, output growth and inflation in four major economies over the past four decades. Our analysis therefore extends recent empirical research on evolving macroeconomic dynamics which has primarily focused on inflation and output and the time-varying impact of monetary policy on these variables. In addition we generalise recent VAR studies on exchange rate dynamics where the analysis is limited to a time-invariant setting. Our main results are as follows. The transmission of demand, supply and nominal shocks to the real exchange rate, output and inflation has changed substantially over time. Demand shocks have a larger impact on the real exchange rate after the mid-1980s for the United Kingdom, euro area and Japan and after the mid-1990s for Canada. Nominal shocks had a larger impact on output and inflation during the 1970s relative to the recent past. The forecast error variance of the real exchange rate is explained mainly by demand shocks with a smaller role for nominal shocks.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 382.

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Length: 82 pages
Date of creation: 10 Mar 2010
Date of revision:
Handle: RePEc:boe:boeewp:0382

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Keywords: Real exchange rate; time-varying VAR; sign restrictions; Bayesian estimation;

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References

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Citations

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Cited by:
  1. Mumtaz, Haroon, 2011. "Estimating the impact of the volatility of shocks: a structural VAR approach," Bank of England working papers 437, Bank of England.
  2. Miles, William & Vijverberg, Chu-Ping, 2011. "Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 644-655.
  3. Özer Karagedikli & Ryan, Michael & Daan Steenkamp & Tugrul Vehbi, 2013. "What happens when the Kiwi flies? Sectoral effects of the exchange rate shocks," Reserve Bank of New Zealand Discussion Paper Series DP2013/05, Reserve Bank of New Zealand.
  4. Mumtaz, Haroon & Theodoridis, Konstantinos, 2012. "The international transmission of volatility shocks: an empirical analysis," Bank of England working papers 463, Bank of England.
  5. Arratibel, Olga & Michaelis, Henrike, 2014. "The impact of monetary policy and exchange rate shocks in Poland: evidence from a time-varying VAR," Working Paper Series 1636, European Central Bank.
  6. Ozer Karagedikli & Michael Ryan & Daan Steenkamp & Tugrul Vehbi, 2013. "What happens when the Kiwi flies? The sectoral effects of the exchange rate shocks," CAMA Working Papers 2013-73, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Roman Horváth & Michal Franta & Marek Rusnák, 2012. "Evaluating Changes in the Monetary Transmission Mechanism in the Czech Republic," Working Papers IES 2012/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2012.
  8. Michal Franta & Jan Libich & Petr Stehlik, 2012. "Tracking Monetary-Fiscal Interactions Across Time and Space," Working Papers 2012/06, Czech National Bank, Research Department.
  9. Philip Liu & Haroon Mumtaz, 2011. "Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1443-1474, October.
  10. Barnett, Alina & Mumtaz, Haroon & Theodoridis, Konstantinos, 2014. "Forecasting UK GDP growth and inflation under structural change. A comparison of models with time-varying parameters," International Journal of Forecasting, Elsevier, vol. 30(1), pages 129-143.

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