 Global and country-specific movements in real effective exchange rates: Implications for external competitivenessJournal of International Money and Finance, 2017, vol. 76, issue C, 88-105 Abstract: Using the Bayesian factor model, we decompose real effective exchange rates, which are considered a measure of external competitiveness, into global and country-specific factors. Among several findings, we report a particular global trend in real exchange rates, but a substantial proportion of their variation is found to be country-specific. In line with this finding, we find that structural shifts, when they do exist, are contained in country-specific factors. Furthermore, consistent with economic theory, this global factor is closely related to a trend in the global interest rate, while country-specific factors are closely related to idiosyncratic movements in the countries’ own interest rates. Such a decomposition results in better understanding of the exchange rate-interest rate relationship, and therefore our results can be interpreted as evidence that external competitiveness is heterogeneous among countries and that economic policies can influence countries’ competitiveness. Keywords: Real effective exchange rate; Factor model; Variance decomposition; External competitiveness (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:76:y:2017:i:c:p:88-105 DOI: 10.1016/j.jimonfin.2017.05.005 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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