Disaggregating Real Exchange Rate Dynamics: A Structural Approach

Punnoose Jacob

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

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.

Keywords: New Open Economy Macroeconomics; Non-Tradables; Real Exchange Rate; Bayesian Inference; DSGE Estimation (search for similar items in EconPapers)
JEL-codes: C11 F41 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-dge and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:10/655

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