Memorandum, Department of Economics, University of Oslo 2003,02
To determine whether the real exchange rate is misaligned with respect to its long-run equilibrium is an important issue for policy makers. This paper clarifies and calculates the concept of the equilibrium real exchange rate, using a structural vector autoregression (VAR) model. By imposing long-run restrictions on a VAR model for Venezuela, four structural shocks are identified: Nominal demand, real demand, supply and oil price shocks. The identified shocks and their impulse responses are consistent with an open economy model of economic fluctuations and highlight the roleof the exchange rate in the transmission mechanism of an oil-producing country.
Exchange rate fluctuations purchasing power parity structural VAR