TIME-VARYING DYNAMICS OF THE REAL EXCHANGE RATE: AN EMPIRICAL ANALYSIS

Authors


Correspondence to: Haroon Mumtaz, Centre for Central Banking Studies, Bank of England, London, UK.

E-mail: haroon.mumtaz@bankofengland.co.uk

SUMMARY

We use a time-varying structural vector autoregression to investigate evolving dynamics of the real exchange rate for the UK, euro area and Canada. We show that demand and nominal shocks have a substantially larger impact on the real exchange rate after the mid 1980s. Real exchange rate volatility, relative to fundamentals, also shows a marked increase after this point in time. However, there is some evidence suggesting a closer business cycle co-movement of the real exchange rate and fundamentals. Simulations from an open-economy DSGE model show that these results are consistent with a decline in exchange rate pass-through. Copyright © 2012 John Wiley & Sons, Ltd.

Ancillary