Estimating exchange rate responsiveness to shocks

Narayan, Paresh Kumar 2008, Estimating exchange rate responsiveness to shocks, Review of financial economics, vol. 17, no. 4, pp. 338-351, doi: 10.1016/j.rfe.2008.01.001.

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Title Estimating exchange rate responsiveness to shocks
Author(s) Narayan, Paresh KumarORCID iD for Narayan, Paresh Kumar
Journal name Review of financial economics
Volume number 17
Issue number 4
Start page 338
End page 351
Publisher Elsevier Inc.
Place of publication Amsterdam, The Netherlands
Publication date 2008-12
ISSN 1058-3300
Keyword(s) real exchange rates
trend-cycle decomposition
permanent and transitory shocks
Summary The goal of this paper is to examine the importance of permanent and transitory shocks using a more efficient trend-cycle decomposition of the real exchange rate series. Our main contribution is that in measuring the impact of shocks, we not only impose common trend restrictions but also common cycle restrictions. We later confirm, through a post sample forecasting exercise, the efficiency gains from imposing common cycle restrictions. Our results indicate that permanent shocks are responsible for the bulk of the real exchange rate variations for Japan, Italy, Germany, France, and the UK vis-à-vis the US dollar over short horizons. For Canada, however, transitory shocks are dominant over the short horizon. In sum, while for Japan, France, and Italy, around 15% of the variation in real exchange rate is due to transitory shocks, for Canada, Germany and the UK, over 25% of the variations over the short horizon are due to transitory shocks. Thus, we claim that the role of transitory shocks should not be ignored.
Language eng
DOI 10.1016/j.rfe.2008.01.001
Field of Research 140207 Financial Economics
HERDC Research category C1 Refereed article in a scholarly journal
HERDC collection year 2008
Copyright notice ©2008, Elsevier Inc.
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