Working Paper: CEPR ID: DP951
Authors: Richard Clarida; Jordi Galí
Abstract: 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.
Keywords: Flexible Exchange Rates; Real Exchange Rate Fluctuations; Structural VAR; Permanent-Transitory Decompositions
JEL Codes: C32; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary shocks (E39) | yen-dollar real exchange rate variability (F31) |
| monetary shocks (E39) | Deutschmark-dollar real exchange rate variability (F31) |
| demand shocks (E39) | real exchange rate volatility (F31) |
| supply shocks (E39) | real exchange rate movements (F31) |