Sources of asymmetric shocks: The exchange rate or other culprits?

Michal Skořepa () and Lubos Komarek ()

Economic Systems, 2015, vol. 39, issue 4, 654-674

Abstract: We analyze and quantify the determinants of medium-term real exchange rate (RER) changes. First, we discuss the sources of asymmetric shocks causing exchange rate variability and the role of the RER as a shock absorber or generator. Secondly, we use data for 21 advanced and late transition economies to gauge the extent to which medium-term bilateral real exchange rate variability can be explained by various fundamental factors. Using Bayesian model averaging, we find that out of 22 factors under consideration, four types of dissimilarities within a given pair of economies are likely to be included in the true model: dissimilarities as regards (i) financial development, (ii) per capita income growth, (iii) central bank autonomy, and (iv) the structure of the economy. A regression based on these four factors indicates that they explain about 96 percent of the sample average level of three year RER variability. In the logic of our approach, the remaining part of the total variability represents an upper estimate of the influence of the foreign exchange market itself. For our sample, the contribution of the real exchange rate itself to asymmetric shocks therefore appears to be very low.

Keywords: Real exchange rate; Asymmetric shocks; OCA; Bayesian model averaging (search for similar items in EconPapers)
JEL-codes: E52 E62 F31 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Sources of Asymmetric Shocks: The Exchange Rate or Other Culprits? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:39:y:2015:i:4:p:654-674

DOI: 10.1016/j.ecosys.2015.04.002

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