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Disaggregating Real Exchange Rate Dynamics: A Structural Approach

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  • P. JACOB

Abstract

This paper employs a small open economy DSGE model, estimated over 1986- 2009, to decompose the dynamic influence of domestic and international prices on the Canada-US real exchange rate. While the real exchange rate mimics the dynamic behavior of the relative price of non-tradables in terms of tradables in response to a non-tradable sector-specific disturbance, the purely tradable component dominates in the case of other shocks, irrespective of their structural origin. Variance decom- positions reveal that the sources of the movements in the tradable component lie in unsystematic deviations from uncovered interest parity as well as import price mark-up shocks. Consequently, these disturbances are far more potent than internal tradable or non-tradable sector-specific disturbances in driving real exchange rate .fluctuations.

Suggested Citation

  • P. Jacob, 2010. "Disaggregating Real Exchange Rate Dynamics: A Structural Approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/655, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:10/655
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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