Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?

Richard Clarida and Jordi Galí

No 4658, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates empirically and attempts to identify the sources of real exchange rate fluctuations since the collapse of Bretton Woods. The paper's first two sections survey and extend earlier, non-structural empirical work on this subject by Campbell and Clarida (1987), Meese and Rogoff (1988), and Cumby and Huizinga (1990). The paper's main contribution is to build and estimate a three equation open macro model in the spirit of Dornbusch (1976) and Obstfeld (1985) and to identify the model's structural shocks - to demand, supply, and money -using the approach pioneered by Blanchard and Quah (1989). For two of the four countries we study, Germany and Japan, our structural estimates imply that monetary shocks, to money supply as well as to the demand for real money balances, explain a substantial amount of the variance of real exchange rates relative to the dollar. We find that demand shocks, to national saving and investment, explain the majority of the variance in real exchange rate fluctuations, while supply shocks explain very little. The model's estimated short run dynamics are strikingly consistent with the predictions of the simple textbook Mundell-Fleming model.

Date: 1994-02
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (339)

Published as Research Papers Presented at the 1994 Texas Conference on Monetary Economics, April 23–24, 1994, Federal Reserve Bank of Dallas
Published as Carnegie-Rochester Conference Series on Public Policy, Vol. 41, December 1994. pp. 1-56.
Published as Richard Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.

Downloads: (external link)
http://www.nber.org/papers/w4658.pdf (application/pdf)

Related works:
Journal Article: Sources of real exchange-rate fluctuations: How important are nominal shocks? (1994)
Journal Article: Sources of real exchange rate fluctuations: how important are nominal shocks? (1994)
Working Paper: Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks? (1994)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4658

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4658

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().