How Important are Nominal Shocks in Driving Real Exchange Rates? / Wie bedeutend sind nominale Schocks zur Erklärung realer Wechselkursbewegungen?
Most of the extant literature identifies the sources of real exchange rate fluctuations by means of structural VAR analysis using long-run identification restrictions only. This paper presents an analogous decomposition on the basis of a simple textbook model of exchange rate determination, where identification is achieved after a suitable triangularization. This identification strategy allows for a calibration on the basis of the contemporaneous restrictions implied by the model. In order to facilitate a comparison with the results from the structural VAR studies, very similar data are used here as well. These are quarterly data collected on the bilateral exchange rates for the Deutsche Mark, the British Pound and the Japanese Yen, all relative to the U.S. Dollar. The implied impulse response functions of the model exhibit impact reactions of the exchange rate following either a monetary (nominal) or a real shock, thus conforming to the asset price property of exchange rates. This is in contrast to the delayed exchange rate responses typical in the structural VAR studies. Moreover, the variance decompositions indicate a dominant role for real shocks, with nominal shocks recognizable at best only in the short run. These results correspond quite closely to those obtained from structural VARs.
Volume (Year): 225 (2005)
Issue (Month): 2 (April)
|Contact details of provider:|| Web page: http://www.degruyter.com|
|Order Information:||Web: http://www.degruyter.com/view/j/jbnst|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
- Olivier Jean Blanchard & Danny Quah, 1988.
"The Dynamic Effects of Aggregate Demand and Supply Disturbance,"
497, Massachusetts Institute of Technology (MIT), Department of Economics.
- Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
- 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.
- Richard Clarida & Jordi Gali, 1994.
"Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?,"
NBER Working Papers
4658, National Bureau of Economic Research, Inc.
- Richard Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
- Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December.
- Jordi Galí & Richard Clarida, 1993. "Sources of real exchage rate fluctuations: How important are nominal shocks?," Economics Working Papers 66, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1994.
- Clarida, Richard & Galí, Jordi, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," CEPR Discussion Papers 951, C.E.P.R. Discussion Papers.
- Alan C. Stockman, 1978.
"A Theory of Exchange Rate Determination,"
UCLA Economics Working Papers
122, UCLA Department of Economics.
- Jon Faust & Eric M. Leeper, 1994.
"When do long-run identifying restrictions give reliable results?,"
International Finance Discussion Papers
462, Board of Governors of the Federal Reserve System (U.S.).
- Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-53, July.
- Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," FRB Atlanta Working Paper 94-2, Federal Reserve Bank of Atlanta.
- Weber, Axel A., 1997. "Sources of Purchasing Power Disparities between the G3 Economies," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 548-583, December.
- Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
- Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
- John H. Rogers, 1998.
"Monetary shocks and real exchange rates,"
International Finance Discussion Papers
612, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Weber, Axel A., 1997. "Sources of Purchasing Power Disparities Between the G3-Economies," Discussion Paper Serie B 419, University of Bonn, Germany.
When requesting a correction, please mention this item's handle: RePEc:jns:jbstat:v:225:y:2005:i:2:p:192-204. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
If references are entirely missing, you can add them using this form.