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The Common-Trend and Transitory Dynamics in Real Exchange Rate Fluctuations

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Author Info

  • Michael Bergman

    (Institute of Economics, University of Copenhagen)

  • Yin-Wong Cheung

    (University of California, Santa Cruz)

  • Kon S. Lai

    (California State University, Los Angeles)

Abstract

This study explores the sources of real exchange rate fluctuations under the current float. Using a cointegration model of the real exchange rate, the innovations are decomposed into transitory and common-trend components. Both transitory and common-trend innovations are found to explain an appreciable portion of real exchange rate fluctuations, albeit their relative importance can vary across major currencies. Further analysis suggests that common-trend innovations are attribut- able to both productivity and monetary changes, albeit transitory innovations are linked primarily to monetary changes. The empirical results are largely consistent with an open-economy macroeconomic model.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2005/05.

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Length: 16 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:kud:kuiefr:200505

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Keywords: real exchange rate; common trend; productivity shock; monetary shock;

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