Accounting for the source of exchange rate movements: new evidence

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 08 August 2005

Working Paper No. 269
By Katie Farrant and Gert Peersman

This paper analyses the role of the real exchange rate in a structural vector autoregression framework for the United Kingdom, euro area, Japan and Canada versus the United States. A new identification strategy is proposed building on sign restrictions. The results are compared to the benchmark conventional approach of Clarida and Gali based on long-run zero restrictions. Although the restrictions are derived from the same theoretical model, the results are strikingly different. In contrast to the benchmark model, an important role for nominal shocks in explaining real exchange rate fluctuations is found.

PDFAccounting for the source of exchange rate movements: new evidence

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