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TIME‐VARYING DYNAMICS OF THE REAL EXCHANGE RATE: AN EMPIRICAL ANALYSIS
Author(s) -
Mumtaz Haroon,
SunderPlassmann Laura
Publication year - 2012
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2270
Subject(s) - exchange rate , economics , econometrics , volatility (finance) , business cycle , vector autoregression , dynamic stochastic general equilibrium , autoregressive model , monetary economics , structural vector autoregression , macroeconomics , monetary policy
SUMMARY We use a time‐varying structural vector autoregression to investigate evolving dynamics of the real exchange rate for the UK, euro area and Canada. We show that demand and nominal shocks have a substantially larger impact on the real exchange rate after the mid 1980s. Real exchange rate volatility, relative to fundamentals, also shows a marked increase after this point in time. However, there is some evidence suggesting a closer business cycle co‐movement of the real exchange rate and fundamentals. Simulations from an open‐economy DSGE model show that these results are consistent with a decline in exchange rate pass‐through. Copyright © 2012 John Wiley & Sons, Ltd.