This paper re-examines the role of supply shocks for real exchange rate fluctuations.
First, in a structural VAR analysis, we combine long run and sign
restrictions to identify productivity and non-productivity supply shocks. Second,
we show that a variance decomposition in the frequency domain generates
quantitatively different results compared to the standard forecast error
variance decomposition. In particular, productivity shocks are the most
important driver of US real effective exchange rate fluctuations at low frequencies,
while real demand shocks are more salient at high frequencies. We
use the spectrum at frequency zero to structurally decompose the persistence
of the real exchange rate. Supply shocks explain more than half of the
persistence of the exchange rate.
Gehrke, Britta and Fang Yao (2017). ‘Are supply shocks important for real exchange rates? A fresh view from the frequency-domain’, Journal of International Money and Finance, Elsevier, Volume 79(C), Pages 99-114, DOI: https://doi.org/10.1016/j.jimonfin.2017.09.008.