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Sources of Fluctuations in Real and Nominal Exchange Rates

William D. Lastrapes
The Review of Economics and Statistics
Vol. 74, No. 3 (Aug., 1992), pp. 530-539
Published by: The MIT Press
DOI: 10.2307/2109498
Stable URL: http://www.jstor.org/stable/2109498
Page Count: 10
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Sources of Fluctuations in Real and Nominal Exchange Rates
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Abstract

This paper attempts to distinguish empirically real versus nominal sources of fluctuations in real and nominal exchange rates. The distinction is obtained by imposing the following restriction on the bivariate vector autoregression of real and nominal exchange rates over the current flexible rate period: nominal shocks are required to have no permanent effect on the level of the real exchange rate. Given this identification scheme, I analyze the dynamic effects and relative importance of real and nominal shocks with regards to exchange rates. The findings indicate that real shocks dominate nominal shocks for both exchange rate series over short and long frequencies.

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