DP951 Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?

Author(s): Richard Clarida, Jordi Galí
Publication Date: June 1994
Keyword(s): Flexible Exchange Rates, Permanent-Transitory Decompositions, Real Exchange Rate Fluctuations, Structural VAR
JEL(s): C32, F31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=951

This paper attempts to identify the sources of real exchange rate fluctuations since the collapse of the Bretton Woods period. We use a structural VAR model with recursive long-run restrictions to decompose the real exchange rate series into three components, associated with supply, demand and monetary shocks. Our estimates imply that monetary shocks account for a substantial fraction of the variability of both yen and Deutschmark real exchange rate variations against the dollar. Demand shocks appear as the largest source of real exchange rate fluctuations for all the currencies considered, while supply shocks seem to play a minor role.