Monetary Shocks and Real Exchange Rates

53 Pages Posted: 17 Sep 1998

See all articles by John H. Rogers

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Date Written: May 1998

Abstract

Many explanations of the stylized facts concerning real exchange rate movements focus on monetary shocks, but it is often found empirically that monetary shocks are unimportant. I provide evidence that is contrary to this empirical finding. Using over 100 years of data, I estimate the contribution of various shocks to explaining variation in the real pound-dollar exchange rate. Monetary shocks consist of both monetary base and money multiplier shocks; real shocks include fiscal, productivity, and preference shocks. Estimates of several alternative VAR specifications provide a range for the contribution of the various shocks: from 19 to 60 percent in the short-run for monetary shocks and 4 to 26 percent for fiscal and productivity shocks combined. My modeling strategy and results are compared directly to related work. The results lend empirical support to the convention in recent quantitative general equilibrium modeling of focusing on monetary shocks.

JEL Classification: F3

Suggested Citation

Rogers, John H., Monetary Shocks and Real Exchange Rates (May 1998). FRB International Finance Discussion Paper No. 612. Available at SSRN: https://ssrn.com/abstract=96612 or http://dx.doi.org/10.2139/ssrn.96612

John H. Rogers (Contact Author)

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

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