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The Common-Trend and Transitory Dynamics in Real Exchange Rate Fluctuations

Author

Listed:
  • Michael Bergman

    (Institute of Economics, University of Copenhagen)

  • Yin-Wong Cheung

    (University of California, Santa Cruz)

  • Kon S. Lai

    (California State University, Los Angeles)

Abstract

This study explores the sources of real exchange rate fluctuations under the current float. Using a cointegration model of the real exchange rate, the innovations are decomposed into transitory and common-trend components. Both transitory and common-trend innovations are found to explain an appreciable portion of real exchange rate fluctuations, albeit their relative importance can vary across major currencies. Further analysis suggests that common-trend innovations are attribut- able to both productivity and monetary changes, albeit transitory innovations are linked primarily to monetary changes. The empirical results are largely consistent with an open-economy macroeconomic model.

Suggested Citation

  • Michael Bergman & Yin-Wong Cheung & Kon S. Lai, 2005. "The Common-Trend and Transitory Dynamics in Real Exchange Rate Fluctuations," FRU Working Papers 2005/05, University of Copenhagen. Department of Economics. Finance Research Unit.
  • Handle: RePEc:kud:kuiefr:200505
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    File URL: http://www.econ.ku.dk/FRU/WorkingPapers/PDF/2005/2005_05.pdf
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    Cited by:

    1. Chen, Shiu-Sheng & Chou, Yu-Hsi, 2015. "Revisiting the relationship between exchange rates and fundamentals," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 1-22.

    More about this item

    Keywords

    real exchange rate; common trend; productivity shock; monetary shock;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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