Economics at your fingertips  

Is the exchange rate a shock absorber or a source of shocks? Evidence from the U.S

Kuhelika De and Wei Sun

Economic Modelling, 2020, vol. 89, issue C, 1-9

Abstract: We examine the stabilization role of the exchange rate in the U.S. economy using a factor augmented vector autoregression model. We find that exchange rate shock explains a large fraction of the variation in exchange rate and transmits major disturbances to the real economy. Further, we find that demand and supply shocks explain less than a quarter of the exchange rate movement. We provide robust evidence that although the exchange rate plays some role as a shock absorber, its role as an independent source of shocks is more dominant for the U.S. economy. The foreign exchange market breeds its own shocks which are destabilizing not only to the value of the dollar but to the overall economy as well. Our results suggest that policymakers need to take foreign exchange market fluctuations into account when making macroeconomic policy decisions.

Keywords: Open economy macroeconomics; Real exchange rate; Monetary policy; Factor augmented vector autoregression model; Shock absorber; Source of shock; U.S. economy (search for similar items in EconPapers)
JEL-codes: C11 C32 E52 F31 F41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
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:

DOI: 10.1016/j.econmod.2019.10.015

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2021-06-30
Handle: RePEc:eee:ecmode:v:89:y:2020:i:c:p:1-9