Global and country-specific factors in real effective exchange rates

Jun Nagayasu

MPRA Paper from University Library of Munich, Germany

Abstract: Using the Bayesian factor model, we decompose movements in real effective exchange rates, which can be considered a measure of external competitiveness, into global and country-specific factors. In data from a number of developed and developing countries, we find a particular global trend in these rates, but a substantial proportion of the variation in these rates is found to be country-specific. In addition, consistent with economic theory, this global factor is closely related to a trend in the global interest rate, while country-specific factors to idiosyncratic movements in countries’ own interest rates.

Keywords: Real effective exchange rates; factor model; variance decomposition; external competitiveness (search for similar items in EconPapers)
JEL-codes: F01 F31 (search for similar items in EconPapers)
Date: 2015-05-01
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:64217

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