Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266067 
Year of Publication: 
2022
Series/Report no.: 
Bank of Canada Staff Discussion Paper No. 2022-6
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We provide a novel daily decomposition of the real exchange rate that exploits a direct link between bond and foreign exchange (FX) markets. Real exchange rate dynamics can be attributed to changes in the expected future level of the exchange rate; cross-country differentials of expected inflation, yields and bond term premia; and an FX risk premium. Through a variance decomposition exercise, we find that the FX risk premium is the dominant component. Monetary policies and macroeconomic news announcements largely move the real exchange through changes in the FX risk premium.
Subjects: 
Asset pricing
Exchange rates
International financial markets
Monetary policy transmission
JEL: 
E43
F31
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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