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Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

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  • Nestor Azcona

    (Babson College)

Abstract

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods prices. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via long-run restrictions and is estimated for a group of advanced economies. The results indicate that for some countries, relative supply shocks can be a significant source of real exchange rate fluctuations.

Suggested Citation

  • Nestor Azcona, 2017. "Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(2), pages 137-148, May.
    • Handle: RePEc:kap:iaecre:v:23:y:2017:i:2:d:10.1007_s11294-017-9635-y
    DOI: 10.1007/s11294-017-9635-y
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    References listed on IDEAS

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    More about this item

    Keywords

    Real exchange rate; Structural VAR; Long-run restrictions; Non-traded goods;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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