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Productivity shocks, monetary shocks, and the short- and long-run dynamics of exchange rates and relative prices

  • Bergman, Michael

    ()

    (Department of Economics, Lund University)

  • Cheung, Yin-Wong

    ()

    (Department of Economics)

  • Lai, Kon S.

    ()

    (Department of Economics)

This study evaluates the individual roles of monetary and productivity shocks in real exchange rate fluctuations under the current float. Using a cointegration model of exchange rates and relative prices, the innovations are decomposed into transitory and common-trend parts. Both transitory and common-trend innovations are found to explain a significant portion of real exchange rate fluctuations, albeit their relative importance can vary across major currencies. Further analysis suggests that common-trend innovations are ascribed mostly to productivity shocks, whereas transitory innovations are governed by monetary shocks. The allowance for productivity shocks, however, appears insufficient to fully explain the high persistence of real exchange rates.

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File URL: http://swopec.hhs.se/lunewp/papers/lunewp2000_004.pdf.zip
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File URL: http://swopec.hhs.se/lunewp/papers/lunewp2000_004.pdf
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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2000:4.

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Length: 32 pages
Date of creation: 13 Jun 2000
Date of revision:
Handle: RePEc:hhs:lunewp:2000_004
Contact details of provider: Postal:
Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden

Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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