Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

Article

Abstract

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods prices. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via long-run restrictions and is estimated for a group of advanced economies. The results indicate that for some countries, relative supply shocks can be a significant source of real exchange rate fluctuations.

Keywords

Real exchange rate Structural VAR Long-run restrictions Non-traded goods 

JEL Classification

F30 F41 

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Copyright information

© International Atlantic Economic Society 2017

Authors and Affiliations

  1. 1.Babson CollegeBabson ParkUSA

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