Advanced Search
MyIDEAS: Login to save this paper or follow this series

Exchange rates and prices: sources of sterling real exchange rate fluctuations 1973-94

Contents:

Author Info

  • Mark S Astley
  • Anthony Garratt

Abstract

This paper attempts to identify the sources of UK exchange rate and relative consumer price fluctuations between 1973 and 1994. We follow Clarida and Gali (1994) in using the Blanchard and Quah (1989) structural VAR (SVAR) method to identify the effects of three structural shocks within a Dornbusch (1976)/Obstfeld (1995) model. We find that IS shocks underlay the majority of the variance of sterling real and nominal exchange rates. Aggregate supply (AS) shocks were the second most important source of such variations, while LM shocks played an extremely limited role. In contrast, the variance of UK relative consumer prices was primarily attributed to LM shocks. Combining those results with the estimated impulse response functions indicates that the sterling exchange rate depreciations over the floating rate period were largely associated with falls in UK relative consumer prices. But it would be inappropriate for policy-makers to base any future policy response to sterling fluctuations on that finding because: (a) the Lucas critique applies to it; and (b) it represents the average dynamic interaction over the sample period. We also find that: (i) the estimated impulse responses following each of the shocks are highly theory-consistent; and (ii) the periods in which the SVARs suggest that particular shocks were especially important can be linked to observed macroeconomic developments. both those findings indicate that the SVAR representations of the data have a high economic content.

Download Info

If 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.
File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1998/wp85.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 85.

as in new window
Length:
Date of creation: Oct 1998
Date of revision:
Handle: RePEc:boe:boeewp:85

Contact details of provider:
Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Email:
Web page: http://www.bankofengland.co.uk/
More information through EDIRC

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report, Federal Reserve Bank of Minneapolis 107, Federal Reserve Bank of Minneapolis.
  2. John H. Rogers, 1995. "Real shocks and real exchange rates in really long-term data," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 493, Board of Governors of the Federal Reserve System (U.S.).
  3. Marco Lippi & Lucrezia Reichlin, 1993. "The dynamic effects of aggregate demand and supply disturbances: comment," ULB Institutional Repository 2013/10159, ULB -- Universite Libre de Bruxelles.
  4. Alan C. Stockman, 1988. "Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory," NBER Working Papers 2565, National Bureau of Economic Research, Inc.
  5. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 655-73, September.
  6. Richard Clarida & Jordi Gali, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," NBER Working Papers 4658, National Bureau of Economic Research, Inc.
  7. Blanchard, Olivier Jean & Quah, Danny, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 653-58, June.
  8. Stefan Gerlach & Frank Smets, 1995. "The monetary transmission mechanism: Evidence from the G-7 countries," BIS Working Papers 26, Bank for International Settlements.
  9. Martin S. Feldstein, 1986. "The Budget Deficit And The Dollar," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 355-409 National Bureau of Economic Research, Inc.
  10. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 819-40, September.
  11. Scott, Andrew, 1996. "The Determinants of UK Business Cycles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1409, C.E.P.R. Discussion Papers.
  12. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
  13. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 117-214, January.
  14. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  15. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  16. De Arcangelis, G., 1995. "Monetary Policy and Exchange-Rate Regimes in Europe; A Structural VAR Approach," Working Papers, Research Seminar in International Economics, University of Michigan 384, Research Seminar in International Economics, University of Michigan.
  17. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-31, November.
  18. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," Working Paper, Federal Reserve Bank of Atlanta 94-2, Federal Reserve Bank of Atlanta.
  19. Martin Eichenbaum & Charles L. Evans, 1993. "Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates," NBER Working Papers 4271, National Bureau of Economic Research, Inc.
  20. Neary, Peter, 1988. "Determinants of the Equilibrium Real Exchange Rate," American Economic Review, American Economic Association, American Economic Association, vol. 78(1), pages 210-15, March.
  21. P J Forsyth & J A Kay, 1980. "The economic implications of North Sea Oil Revenues," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 1(3), pages 1-28, July.
  22. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 283-308, November.
  23. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  24. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 709-38, May.
  25. Catherine Mann, 1989. "The effects of exchange rate trends and volatility on export prices: Industry examples from Japan, Germany, and the United States," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 125(3), pages 588-618, September.
  26. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  27. Eastwood, R K & Venables, A J, 1982. "The Macroeconomic Implications of a Resource Discovery in an Open Economy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 92(366), pages 285-99, June.
  28. Huizinga, John, 1987. "An empirical investigation of the long-run behavior of real exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 27(1), pages 149-214, January.
  29. Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(4), pages 635-54, November.
  30. Evans, Martin D. D. & Lothian, James R., 1993. "The response of exchange rates to permanent and transitory shocks under floating exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 12(6), pages 563-586, December.
  31. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-39, August.
  32. Alain DeSerres & Alain Guay, 1995. "Selection of the Truncation Lag in Structural VARs (or VECMs) with Long-Run Restrictions," Econometrics, EconWPA 9510001, EconWPA.
  33. John W. Keating, 1992. "Structural approaches to vector autoregressions," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 37-57.
  34. Marian E. Bond & Adalbert Knöbl, 1982. "Some Implications of North Sea Oil for the U.K. Economy (Le pétrole de la mer du Nord: ses effets sur l'économie du Royaume-Uni) (Algunas consecuencias de la explotación del petróleo del m," IMF Staff Papers, Palgrave Macmillan, vol. 29(3), pages 363-397, September.
  35. Maurice Obstfeld, 1985. "Floating Exchange Rates: Experience and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 369-464.
  36. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 32(3-4), pages 339-352, May.
  37. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Dermot Hodson, 2003. "The Exchange Rate as an Adjustment Mechanism - A Structural VAR Approach to the Case of Ireland," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 34(2), pages 151-172.
  2. McCoy, Daniel, 1997. "How useful is Structural VAR Analysis for Irish economics?," Research Technical Papers 2/RT/97, Central Bank of Ireland.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:85. See general 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: (Publications Team).

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.