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

Author

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  • Bergman, Michael

    (Department of Economics, Lund University)

  • Cheung, Yin-Wong

    (Department of Economics)

  • Lai, Kon S.

    (Department of Economics)

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.

Suggested Citation

  • Bergman, Michael & Cheung, Yin-Wong & Lai, Kon S., 2000. "Productivity shocks, monetary shocks, and the short- and long-run dynamics of exchange rates and relative prices," Working Papers 2000:4, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2000_004
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    More about this item

    Keywords

    Real exchange rate; real shock; monetary shock; transitory component; common trend;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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