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Real Shock or Nominal Shock? Exchange Rate Movements in Cambodia and Lao PDR

This paper discusses a primary factor responsible for exchange rate fluctuations of the Cambodian riel and the Laotian kip against the US dollar. The dynamic effects of real and nominal shocks are examined through applying a vector autoregression (VAR) model of real and nominal exchange rates under the assumption of the long-run neutrality of nominal shocks on real exchange rates. This approach allows us to decompose exchange rate movements into two components, real and nominal factors, in order to identify how these factors influence exchange rate fluctuations. The empirical analysis demonstrates that real shocks in direction of depreciation lead to real and nominal depreciation, while nominal shocks induce long-run nominal depreciation but real appreciation in the short-run.

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Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2010_05.

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Length: 35 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:iuj:wpaper:ems_2010_05
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