Is the exchange rate a shock absorber or a source of shocks? New empirical evidence

Katie Farrant and Gert Peersman ()

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper analyses the role of the real exchange rate in a structural vector autoregression (sVAR) framework for the United Kingdom, Euro area, Japan and Canada vis-á-vis 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 (1994) based on long-run zero restrictions. Although the restrictions are derived from the same theoretical model, the results are strikingly di??erent. In contrast to the benchmark model, an important role for nominal shocks in explaining real exchange rate fluctuations is found. Hence, the exchange rate can rather be considered as a source of shocks instead of a shock absorber.

Keywords: exchange rates; vector autoregressions (search for similar items in EconPapers)
JEL-codes: C32 E42 F31 F33 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2005-01
New Economics Papers: this item is included in nep-ifn and nep-mac
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Citations: View citations in EconPapers (26)

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http://wps-feb.ugent.be/Papers/wp_05_285.pdf (application/pdf)

Related works:
Journal Article: Is the Exchange Rate a Shock Absorber or a Source of Shocks? New Empirical Evidence (2006)
Working Paper: Accounting for the source of exchange rate movements: new evidence (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:05/285

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