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An oversimplified inquiry into the sources of exchange rate variability

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  • Kempa, Bernd

Abstract

Exchange rates as well as relative price level and output movements are decomposed into components associated with nominal shocks as well as shocks to aggregate supply and aggregate demand. In contrast to previous analyses of such decompositions based on statistical vector autoregression (VAR) analysis, this study takes as a starting point a simple textbook model of exchange rate determination, augments it by allowing for suitably defined random shocks and transforms it into a triangular format resembling the identification procedure of the VAR methodology. Applied to major bilateral exchange rate series, the decomposition suggests that exchange rate variability is mostly driven by shocks to aggregate demand, partcularly in the longer run. Overall, the evidence is roughly in line with previous decompositions obtained from statistical VARs. --

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Bibliographic Info

Paper provided by University of Duisburg-Essen, Faculty for Economics and Business Administration in its series IBES Diskussionsbeiträge with number 129.

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Date of creation: 2003
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Handle: RePEc:zbw:udewwd:129

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Fax: 0201 - 183 2292
Web page: http://www.wiwi.uni-due.de/en/
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Keywords: exchange rates; vector autoregression; nominal and real shocks;

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Cited by:
  1. Francis M. Kemegue & Reneé van Eyden & Emmanuel Owusu-Sekyere, 2011. "Remittances and the Dutch disease in Sub-Saharan Africa. A Dynamic Panel Approach," Working Papers 259, Economic Research Southern Africa.
  2. Greß, Stefan, 2004. "Competition in Social Health Insurance: A Three-Country Comparison," IBES Diskussionsbeiträge 135, University of Duisburg-Essen, Faculty for Economics and Business Administration.
  3. Ben. U. Omojimite & Victor E. Oriavwote, 2012. "An Empirical Assessment of the Real Exchange Rate and Poverty in Nigeria," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(1), pages 244-254, March.

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