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

TY - JOUR

T1 - The common-trend and transitory dynamics in real exchange rate fluctuations

AU - Bergman, Ulf Michael

AU - Cheung, Yin-Wong

AU - Lai, Kon S.

PY - 2011/1

Y1 - 2011/1

N2 - 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.

AB - 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.

U2 - 10.1080/00036841003742645

DO - 10.1080/00036841003742645

M3 - Journal article

SN - 0003-6846

VL - 43

SP - 1

EP - 18

JO - Applied Economics

JF - Applied Economics

IS - 1

ER -