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Sources of Real Exchange Rate Fluctuations: The Role of Supply Shocks Revisited

  • Gehrke, Britta
  • Yao, Fang

This paper re-examines the role of real supply shocks in international business cycles. In contrast to previous studies, we extend the concept of supply shocks beyond the productivity shock towards labor supply shocks. Our analysis simultaneously identifies five real and nominal disturbances in a unified framework. We identify a structural VAR by imposing sign restrictions from a New Open Economy Macro model. We find evidence that real supply disturbances account for 15% 25% of real exchange rate and trade balance fluctuations of the US vis- -vis an aggregate of industrialized countries . The real exchange rate is further driven by nominal shocks originating in financial markets. In light of these results, real exchange rate adjustments serve as an important absorber of asymmetric real supply shocks.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79821.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79821
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