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Are supply shocks important for real exchange rates? A fresh view from the frequency-domain

Britta Gehrke () and Fang Yao

Journal of International Money and Finance, 2017, vol. 79, issue C, 99-114

Abstract: This paper re-examines the role of supply shocks for real exchange rate fluctuations and contributes by exploiting insights from the frequency-domain perspective. In contrast to the existing literature, our empirical findings point towards an important role played by supply (productivity) shocks in driving US real effective exchange rate fluctuations at low frequencies, while real demand shocks matter mostly at high and medium frequencies. In addition, we propose an approach to structurally decompose the persistence of the real exchange rate and find that supply shocks explain up to half of its persistence.

Keywords: Real exchange rate; Supply shocks; SVAR; Spectral variance decomposition (search for similar items in EconPapers)
JEL-codes: C32 F31 F32 F41 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jimonfin.2017.09.008

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