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Sources of real exchange rate fluctuations: how important are nominal shocks?

  • Richard Clarida
  • Jordi Gali

This paper attempts to identify the sources of real exchange rate fluctuations since the collapse of the Bretton Woods period. We use a structural VAR model with recursive long-run restrictions to decompose the real exchange rate series into three components, associated with supply, demand and monetary shocks. Our estimates imply that monetary shocks account for a substantial fraction of the variability of both yen and Deutschmark real exchange rate variations against the dollar. Demand shocks appear as the largest source of real exchange rate fluctuations for all the currencies considered, while supply shocks seem to play a minor role.

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Article provided by Federal Reserve Bank of Dallas in its journal Proceedings.

Volume (Year): (1994)
Issue (Month): Apr ()
Pages:

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Handle: RePEc:fip:feddpr:y:1994:i:apr:n:3
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  1. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  2. Jeffrey Sachs, 1985. "The Dollar and the Policy Mix: 1985," NBER Working Papers 1636, National Bureau of Economic Research, Inc.
  3. Meese, R. & Rogoff, K., 1988. "Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period," Working papers 368, Wisconsin Madison - Social Systems.
  4. Maurice Obstfeld, 1985. "Floating Exchange Rates: Experience and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 369-464.
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  8. Campbell, John Y. & Clarida, Richard H., 1987. "The dollar and real interest rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 103-139, January.
  9. Tamim Bayoumi & Barry Eichengreen, 1992. "Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton Woods Float: An Impulse-Response Analysis," NBER Working Papers 4169, National Bureau of Economic Research, Inc.
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  11. Lars Peter Hansen & Robert J. Hodrick, 1983. "Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 113-152 National Bureau of Economic Research, Inc.
  12. Hali J. Edison & B. Dianne Pauls, 1991. "Re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990," International Finance Discussion Papers 408, Board of Governors of the Federal Reserve System (U.S.).
  13. Martin Eichenbaum & Charles L. Evans, 1993. "Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates," NBER Working Papers 4271, National Bureau of Economic Research, Inc.
  14. Robert E. Cumby & Maurice Obstfeld, 1982. "International Interest-Rate and Price-Level Linkages Under Flexible Exchange Rates: A Review of Recent Evidence," NBER Working Papers 0921, National Bureau of Economic Research, Inc.
  15. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
  16. Martin Feldstein, 1993. "The Dollar and the Trade Deficit in the 1980s: A Personal View," NBER Working Papers 4325, National Bureau of Economic Research, Inc.
  17. Robert P. Flood, 1981. "Explanations of Exchange Rate Volatility and Other Empirical Regularities in Some Popular Models of the Foreign Exchange Market," NBER Working Papers 0625, National Bureau of Economic Research, Inc.
  18. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-39, August.
  19. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June.
  20. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  21. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
  22. Frenkel, Jacob A, 1981. "Flexible Exchange Rates, Prices, and the Role of "News": Lessons from the 1970s," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 665-705, August.
  23. Cumby, Robert E. & Huizinga, John, 1991. "The predictability of real exchange rate changes in the short and long run," Japan and the World Economy, Elsevier, vol. 3(1), pages 17-38, April.
  24. Allan H. Meltzer, 1993. "Real exchange rates: some evidence from the postwar years," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 103-117.
  25. Jordi Galí, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
  26. Evans, Martin D. D. & Lothian, James R., 1993. "The response of exchange rates to permanent and transitory shocks under floating exchange rates," Journal of International Money and Finance, Elsevier, vol. 12(6), pages 563-586, December.
  27. George Evans & Lucrezia Reichlin, 1994. "Information, forecasts and measurement of the business cycle," ULB Institutional Repository 2013/10155, ULB -- Universite Libre de Bruxelles.
  28. Jeffrey R. Shafer & Bonnie E. Loopesko, 1983. "Floating Exchange Rates after Ten years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 1-86.
  29. Grilli, Vittorio & Kaminsky, Graciela, 1991. "Nominal exchange rate regimes and the real exchange rate : Evidence from the United States and Great Britain, 1885-1986," Journal of Monetary Economics, Elsevier, vol. 27(2), pages 191-212, April.
  30. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-93, December.
  31. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-87, December.
  32. Flood, Robert P., 1981. "Explanations of exchange-rate volatility and other empirical regularities in some popular models of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 219-249, January.
  33. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
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