The Common-Trend and Transitory Dynamics in Real Exchange Rate Fluctuations
AbstractThis 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 InfoPaper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2005/05.
Length: 16 pages
Date of creation: May 2005
Date of revision:
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real exchange rate; common trend; productivity shock; monetary shock;
Other versions of this item:
- U. Michael Bergman & Yin-Wong Cheung & Kon Lai, 2011. "The common-trend and transitory dynamics in real exchange rate fluctuations," Applied Economics, Taylor and Francis Journals, vol. 43(1), pages 1-18.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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