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Time-Varying Dynamics Of The Real Exchange Rate. A Structural VAR Analysis

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Executive Summary

This paper is to explore the evolution of real exchange rate dynamics over time. The authors use a time-varying structural vector auto regression to investigate the role of demand, supply and nominal shocks and consider their impact on and contribution to fluctuations in, the real exchange rate, output growth and inflation in four major economies over the past four decades. The analysis therefore extends recent empirical research on evolving macroeconomic dynamics which has primarily focused on inflation and output and the time-varying impact of monetary policy on these variables. In addition they generalize recent VAR studies on exchange rate dynamics where the analysis is limited to a time-invariant setting.

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