The Common-Trend and Transitory Dynamics in Real Exchange Rate Fluctuations
Yin-Wong Cheung and
Kon S. Lai
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Michael Bergman: Institute of Economics, University of Copenhagen
Kon S. Lai: California State University, Los Angeles
No 2005/05, FRU Working Papers from University of Copenhagen. Department of Economics. Finance Research Unit
This study explores the sources of real exchange rate fluctuations under the current float. Using a cointegration model of the real exchange rate, the innovations are decomposed into transitory and common-trend components. Both transitory and common-trend innovations are found to explain an appreciable portion of real exchange rate fluctuations, albeit their relative importance can vary across major currencies. Further analysis suggests that common-trend innovations are attribut- able to both productivity and monetary changes, albeit transitory innovations are linked primarily to monetary changes. The empirical results are largely consistent with an open-economy macroeconomic model.
Keywords: real exchange rate; common trend; productivity shock; monetary shock (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
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Journal Article: The common-trend and transitory dynamics in real exchange rate fluctuations (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiefr:200505
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