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Real exchange rate fluctuations and monetary shocks: a revisit

  • Shiu-Sheng Chen

    (Department of Economics, University of Wisconsin-Madison, USA)

In this paper, I first estimate a structural VAR model by following Clarida and Gali (1994) and obtain results indicating that the variance of real exchange rates can be attributed more to monetary shocks when the sample span is extended. In order to further investigate this aspect, I then employ a VAR model with long-run US-UK annual data from 1889 to 1995. According to the variance decompositions, I find that monetary shocks can explain nearly 50% of real exchange rate variance in the long-run sample periods. All the evidence suggests that monetary shocks are indeed more important in a larger sample set. Copyright © 2003 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.218
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 9 (2004)
Issue (Month): 1 ()
Pages: 25-32

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Handle: RePEc:ijf:ijfiec:v:9:y:2004:i:1:p:25-32
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  1. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  2. Baldwin, Richard, 1988. "Hyteresis in Import Prices: The Beachhead Effect," American Economic Review, American Economic Association, vol. 78(4), pages 773-85, September.
  3. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
  4. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
  5. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  6. 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.
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