Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322325 
Year of Publication: 
2024
Series/Report no.: 
Working Paper No. 21/2024
Publisher: 
Norges Bank, Oslo
Abstract: 
This paper examines the structural determinants of real exchange rates, emphasizing the persistent low-frequency movements that traditional models, such as Purchasing Power Parity (PPP) and Uncovered Interest Parity (UIP), often fail to capture. To address this, we propose a structural VAR model with common trends, enabling a clear distinction between transitory and long-term effects of structural shocks. Estimated using Bayesian techniques and applied to Canada and Norway - two resourcerich economies - the model reveals that productivity shifts and commodity market trends significantly influence domestic activity and the real exchange rate in both countries. Importantly, the model also avoids the delayed overshooting puzzle commonly associated with recursive VARs in response to monetary policy shocks. Instead, it generates exchange rate dynamics consistent with the UIP hypothesis, characterized by immediate overshooting followed by a gradual depreciation to equilibrium.
Subjects: 
Oil shocks
Resource movement
productivity differentials
Long run
SVAR
JEL: 
C32
F41
O47
Q3
Persistent Identifier of the first edition: 
ISBN: 
978-82-8379-350-5
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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