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EXCHANGE RATE AND US MACROECONOMY: EVIDENCE FROM THE FACTOR-AUGMENTED VECTOR AUTOREGRESSIVE MODEL

Lian An, Xiaomei Ren (), Huimin Li () and Jing Xu ()
Additional contact information
Lian An: Coggin College of Business, University of North Florida, Jacksonville, FL 32224, USA
Xiaomei Ren: Reliant Energy, 1201 Fannin St, Houston, TX 77002, USA
Huimin Li: College of Business and Public Management, West Chester University, West Chester, PA, 19383, USA
Jing Xu: Brooks College of Health, University of North Florida, USA

The Singapore Economic Review (SER), 2017, vol. 62, issue 02, 483-508

Abstract: This paper aims to examine the macroeffects of exchange rate movements on a wide array of real economic variables in the US in a unifying model. By employing the non-linear factor-augmented vector autoregressive (FAVAR) model with simulation methods, we could trace the effects of exchange rate appreciation and depreciation on a wide array of macroeconomic variables through the impulse response function (IRF). The main findings are: (1) In response to dollar depreciation, import price index (IMP), producer price index (PPI) and CPI increase significantly. The pass-through ratio declines along the distribution chain. (2) Merchandise trade balance, current account balance and output improve facing dollar depreciation. (3) Savings decreases in response to dollar depreciation. (4) Employment and average hourly earnings increase in times of exchange rate depreciation and vice versa. The effects on macroeconomy from appreciation and depreciation seem symmetric. Many other interesting findings are also documented.

Keywords: Exchange rate; macro economy; factor-augmented vector autoregression (search for similar items in EconPapers)
Date: 2017
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