Sources of exchange rate fluctuations with Taylor rule fundamentals

Bernd Kempa and Wolfram Wilde

Economic Modelling, 2011, vol. 28, issue 6, 2622-2627

Abstract: This paper investigates the sources of exchange rate fluctuations when monetary policy follows a Taylor rule interest rate reaction function. We first present a simple dynamic exchange rate model with Taylor rule fundamentals which is triangular in the long-run impacts of shocks to the output market, the interest rate differential, and the Taylor rule. We then proceed to assess the relative importance of various shocks in exchange rate determination by estimating a structural VAR with long-run identification restrictions based on the triangular structure of the model. We find demand shocks to be less important than in earlier VAR studies, with both supply shocks and nominal shocks explaining a substantial part of real exchange rate fluctuations.

Keywords: Exchange rate fluctuations; Taylor rule; Structural VAR (search for similar items in EconPapers)
JEL-codes: E5 F31 F41 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:6:p:2622-2627

DOI: 10.1016/j.econmod.2011.08.004

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