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Phillips curve shocks and real exchange rate fluctuations: SVAR evidence

Britta Gehrke () and Fang Yao

No 11/2014, FAU Discussion Papers in Economics from Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics

Abstract: Steinsson (2008) shows that real shocks that affect the New Keynesian Phillips curve explain the behavior of the real exchange rate in a sticky-price business cycle model. This paper reveals that these shocks are important for the volatility of the real exchange rate in the data. In a structural VAR analysis, we identify productivity, labor supply, cost-push, government spending, risk premium, and monetary policy shocks using sign restrictions derived from Steinsson's model. We study different methods of variance decomposition. According to the forecast error variance decomposition, the real demand shocks are the most important source of real exchange rate volatility. At business cycle frequencies, however, three supply shocks account for up to 40 percent of real exchange rate fluctuations.

Keywords: real exchange rate; supply shock; structural vector autoregression; sign restriction; business cycle variance decomposition (search for similar items in EconPapers)
JEL-codes: C32 F31 F32 F41 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-opm
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