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Persistence and Volatility of Real Exchange Rates: The Role of Supply Shocks Revisited

Britta Gehrke () and Fang Yao

VfS Annual Conference 2016 (Augsburg): Demographic Change from Verein für Socialpolitik / German Economic Association

Abstract: This paper re-examines the role of supply shocks for real exchange rate fluctuations. First, in a structural VAR analysis, we combine long run and sign restrictions to identify productivity and non-productivity supply shocks. Second, we show that a variance decomposition in the frequency domain generates quantitatively different results compared to the standard forecast error variance decomposition. In particular, productivity shocks emerge as the most important driver of US real effective exchange rate fluctuations at low frequencies, while real demand shocks are more salient at high frequencies. We use the spectrum at frequency zero to structurally decompose the persistence of the real exchange rate. Supply shocks explain more than half of the persistence of the exchange rate.

JEL-codes: C32 F31 F41 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-opm
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Working Paper: Persistence and volatility of real exchange rates: the role of supply shocks revisited (2016) Downloads
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