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Total Factor Productivity and the Real Exchange Rate in a Small Open Economy: The Relative Importance of Permanent and Transitory Shocks


  • Hjelm, Göran

    (Department of Economics, Lund University)


Recent theoretical research suggest that monetary shocks might play an important role in explaining movements in the real exchange rate in the short and medium run. Empirically, the contribution of transitory (monetary) disturbances in explaining the variance decomposition of real exchange rates has varied substantially in the recent literature. In this paper, we construct new quarterly series of total factor productivity for Sweden and Japan. We find that these series and the real exchange rate are cointegrated and estimate a so called common trends model. The two permanent shocks are identified as being productivity shocks of Japan and Sweden, respectively, and it is shown that the transitory shock can be interpreted as being of monetary origin. Contrary to the predictions of recent theoretical models, the transitory shocks explains only a minor part of the movements in the real exchange rate (7.2 percent after two quarters at most) which implies that productivity shocks clearly dominate the picture

Suggested Citation

  • Hjelm, Göran, 2001. "Total Factor Productivity and the Real Exchange Rate in a Small Open Economy: The Relative Importance of Permanent and Transitory Shocks," Working Papers 2001:23, Lund University, Department of Economics.
  • Handle: RePEc:hhs:lunewp:2001_023

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    Cited by:

    1. Lindblad, Hans & Sellin, Peter, 2006. "A Simultaneous Model of the Swedish Krona, the US Dollar and the Euro," Working Paper Series 193, Sveriges Riksbank (Central Bank of Sweden).

    More about this item


    Real exchange rates; Total factor productivity; Common trends;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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