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The Changing Nature of Real Exchange Rate Fluctuations. New Evidence for Inflation-Targeting Countries

Author

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  • Rodrigo Caputo
  • Gustavo Leyva
  • Michael Pedersen

Abstract

We assess the role of real and nominal shocks on the real exchange rate (RER) dynamics for a set of small open economies. In doing so, we estimate a SVAR model for five inflation targeting countries: Australia, Canada, Chile, Israel and Norway. In sharp contrast with the existing empirical evidence, we find that in most countries demand shocks tend to explain a small proportion of RER volatility for the period 1986-2011. In that period nominal shocks are relatively more important in explaining RER fluctuations. When we perform a subsample analysis, however, we can reconcile the empirical findings in the literature with our results. In particular, we conclude that the relative importance of demand shocks has been declining substantially over time. In contrast, the relative importance of nominal shocks, and in particular exchange rate shocks, increased importantly in the last decade.

Suggested Citation

  • Rodrigo Caputo & Gustavo Leyva & Michael Pedersen, 2014. "The Changing Nature of Real Exchange Rate Fluctuations. New Evidence for Inflation-Targeting Countries," Working Papers Central Bank of Chile 730, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:730
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    References listed on IDEAS

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