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The common-trend and transitory dynamics in real exchange rate fluctuations

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This study examines the behaviour of both Common Trend (CT) and transitory components of Real Exchange Rate (RER) fluctuations under the current float. The CT component is in most cases found to be sizeable, albeit its relative importance can vary considerably across major currencies and its estimate can be sensitive to whether or not long-run Purchasing Power Parity (PPP) is imposed on the data. Further analysis suggests that both CT and transitory innovations are linked much more to interest rate changes than to productivity changes. Accordingly, it is interest rate, not productivity, disturbances that drive the highly persistent RER.

Document Type: Research Article


Affiliations: 1: Department of Economics, University of Copenhagen, DK-1455 Copenhagen K, Denmark 2: Department of Economics, University of California, Santa Cruz, CA 95064, USA,City University of Hong Kong, Hong Kong,Shandong University, Jinan, Shandong, China 3: Department of Economics and Statistics, California State University, Los Angeles, CA 90032, USA

Publication date: January 1, 2011

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