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The relative importance of symmetric and asymmetric shocks and the determination of the exchange rate



This paper shows how sign restrictions can be used to identify symmetric and asymmetric shocks in a simple two-country structural VAR. Specifically, the e??ects of symmetric and asymmetric supply, demand and monetary policy shocks as well as pure exchange rate shocks are estimated. The results can be used to deal with two issues. First, it is possible to estimate the relative importance of symmetric, asymmetric and pure exchange rate shocks across two countries or areas, which provides information about the degree of business cycle synchronization. Second, it is also possible to evaluate the relative importance of these shocks in determining exchange rate fluctuations, which can deliver answers to questions like ’Is the exchange rate a shock absorber or source of shocks?’. Evidence is provided for the UK versus the Euro area and compared with the US as a benchmark.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 05/286.

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Length: 29 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:rug:rugwps:05/286
Contact details of provider: Postal: Hoveniersberg 4, B-9000 Gent
Phone: ++ 32 (0) 9 264 34 61
Fax: ++ 32 (0) 9 264 35 92
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  1. Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December.
  2. Erkel-Rousse, Hélène & Melitz, Jacques, 1995. "New Empirical Evidence on the Costs of European Monetary Union," CEPR Discussion Papers 1169, C.E.P.R. Discussion Papers.
  3. Forni, Mario & Lippi, Marco & Reichlin, Lucrezia, 2003. "Opening the Black Box: Structural Factor Models versus Structural VARs," CEPR Discussion Papers 4133, C.E.P.R. Discussion Papers.
  4. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld, 1985. "Floating Exchange Rates: Experience and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 369-464.
  6. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  7. repec:fth:inseep:9516 is not listed on IDEAS
  8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  9. Detken, Carsten & Dieppe, Alistair & Henry, Jérôme & Marin, Carmen & Smets, Frank, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 0160, European Central Bank.
  10. Fabio Canova & Gianni De Nicolo, 2000. "Monetary disturbances matter for business fluctuations in the G-7," International Finance Discussion Papers 660, Board of Governors of the Federal Reserve System (U.S.).
  11. Nick Chamie & Alain DeSerres & Rene Lalonde, 1994. "Optimum Currency Areas and Shock Asymmetry A Comparison of Europe and the United States," International Finance 9406001, EconWPA, revised 23 Jun 1994.
  12. Michael Funke, 2000. "Macroeconomic Shocks in Euroland vs the UK: Supply, Demand, or Nominal?," Quantitative Macroeconomics Working Papers 20001, Hamburg University, Department of Economics.
  13. Farrant, Katie & Peersman, Gert, 2006. "Is the Exchange Rate a Shock Absorber or a Source of Shocks? New Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 939-961, June.
  14. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 207-244, December.
  15. Matthew B. Canzoneri & Javier Vallés & José Viñals, 1996. "Do Exchange Rate Move to Address International Macroeconomic Imbalances?," Banco de Espa�a Working Papers 9626, Banco de Espa�a.
  16. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
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