Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/101321
Authors: 
Gehrke, Britta
Yao, Fang
Year of Publication: 
2014
Series/Report no.: 
IWQW Discussion Paper Series 11/2014
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.
Subjects: 
real exchange rate
supply shock
structural vector autoregression
sign restriction
business cycle variance decomposition
JEL: 
C32
F31
F32
F41
Document Type: 
Working Paper

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