Real exchange rate and net trade dynamics: Financial and trade shocks

Marcos Mac Mullen and Soo Kyung Woo

Journal of International Economics, 2025, vol. 157, issue C

Abstract: This paper studies the drivers of the US real exchange rate (RER), with a particular focus on its comovement with net trade (NT) flows. We consider the entire spectrum of frequencies, as the low-frequency variation accounts for 62 and 64 percent of the unconditional variance of the RER and NT, respectively. We develop a generalization of the standard international business cycle model that successfully rationalizes the joint dynamics of the RER and NT while accounting for the major puzzles of the RER. We find that, while financial shocks are necessary to capture high frequency variation in the RER, trade shocks are essential for the lower frequency fluctuations.

Keywords: International business cycles; Exchange rates; Trade balance; Trade dynamics (search for similar items in EconPapers)
JEL-codes: E30 E44 F30 F41 F44 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:157:y:2025:i:c:s0022199625000984

DOI: 10.1016/j.jinteco.2025.104141

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