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Accounting for the source of exchange rate movements: new evidence

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  • Katie Farrant
  • Gert Peersman

Abstract

This paper analyses the role of the real exchange rate in a structural vector autoregression framework for the United Kingdom, euro area, Japan and Canada versus the United States. A new identification strategy is proposed building on sign restrictions. The results are compared to the benchmark conventional approach of Clarida and Gali based on long-run zero restrictions. Although the restrictions are derived from the same theoretical model, the results are strikingly different. In contrast to the benchmark model, an important role for nominal shocks in explaining real exchange rate fluctuations is found.

Suggested Citation

  • Katie Farrant & Gert Peersman, 2005. "Accounting for the source of exchange rate movements: new evidence," Bank of England working papers 269, Bank of England.
  • Handle: RePEc:boe:boeewp:269
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2005/WP269.pdf
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