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Global and country-specific factors in real effective exchange rates

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  • Nagayasu, Jun

Abstract

Using the Bayesian factor model, we decompose movements in real effective exchange rates, which can be considered a measure of external competitiveness, into global and country-specific factors. In data from a number of developed and developing countries, we find a particular global trend in these rates, but a substantial proportion of the variation in these rates is found to be country-specific. In addition, consistent with economic theory, this global factor is closely related to a trend in the global interest rate, while country-specific factors to idiosyncratic movements in countries’ own interest rates.

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  • Nagayasu, Jun, 2015. "Global and country-specific factors in real effective exchange rates," MPRA Paper 64217, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:64217
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    More about this item

    Keywords

    Real effective exchange rates; factor model; variance decomposition; external competitiveness;
    All these keywords.

    JEL classification:

    • F01 - International Economics - - General - - - Global Outlook
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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