The Common-Trend and Transitory Dynamics in Real Exchange Rate Fluctuations

Michael Bergman, 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

Abstract: 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)
Pages: 16 pages
Date: 2005-05
New Economics Papers: this item is included in nep-ifn
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