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Productivity shocks, monetary shocks, and the short- and long-run dynamics of exchange rates and relative prices

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Author Info
Bergman, Michael () (Department of Economics, Lund University)
Cheung, Yin-Wong () (Department of Economics)
Lai, Kon S. () (Department of Economics)

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Abstract

This study evaluates the individual roles of monetary and productivity shocks in real exchange rate fluctuations under the current float. Using a cointegration model of exchange rates and relative prices, the innovations are decomposed into transitory and common-trend parts. Both transitory and common-trend innovations are found to explain a significant portion of real exchange rate fluctuations, albeit their relative importance can vary across major currencies. Further analysis suggests that common-trend innovations are ascribed mostly to productivity shocks, whereas transitory innovations are governed by monetary shocks. The allowance for productivity shocks, however, appears insufficient to fully explain the high persistence of real exchange rates.

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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2000:4.

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Length: 32 pages
Date of creation: 13 Jun 2000
Date of revision:
Handle: RePEc:hhs:lunewp:2000_004

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/
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Related research
Keywords: Real exchange rate; real shock; monetary shock; transitory component; common trend;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

This paper has been announced in the following NEP Reports:

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