What Determines Real Exchange Rate Fluctuations?

A. Ouyang

Chapter 2 in Economic Management in a Volatile Environment, 2015, pp 27-48 from Palgrave Macmillan

Abstract: Abstract The real exchange rate (RER) is one of the most important price variables in macroeconomics as changes in it have implications for both external competitiveness as well as internal sectoral resource allocation. Accordingly, a great deal of attention has been paid to the causes of real exchange rate volatility. Broadly, there are four sets of literature in this area. The first focusses on linking RER volatility to the exchange rate regime and, in particular, the rise in volatility as a country shifts from fixed to flexible regimes — so-called “Mussa puzzle” (Stockman, 1983; Mussa, 1986). The second set of literature employs Vector Auto Regression (VAR) methods and variance decomposition techniques to estimate the relative contributions of real and nominal shocks to RER fluctuations (for example, see Clarida and Gali, 1994; Enders and Lee, 1997; Lastrapes, 1992; and Rogers, 1999). The third deals with the fundamental determinants of the long-run equilibrium RER (such as productivity, government spending, net foreign asset position, etc.) (for instance, see MacDonald, 2000; Ricci et al., 2008). A closely related literature attempts to determine the drivers of long-run deviations from purchasing power parity (PPP) and focusses on the reasons behind the well-known “PPP puzzle” Froot and Rogoff (1995) and Rogoff (1996) offer authoritative surveys. This literature also recognises the time-varying nature of the long-run RER which could evolve over time based on a set of economic and financial fundamentals.

Keywords: Real Exchange Rate; Relative Price; Purchase Power Parity; Exchange Rate Regime; Nontradable Good (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-37152-2_2

Ordering information: This item can be ordered from
http://www.palgrave.com/9781137371522

DOI: 10.1057/9781137371522_2

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().