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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)

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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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Publisher 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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Related research
Keywords: real exchange rate common trend productivity shock monetary shock

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

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