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Actual source of exchange rate fluctuations

Author: ChengFeng
Tutor: YangChangJiang
School: Fudan University
Course: Finance
Keywords: The real exchange rate Variance Decomposition Tradeables Balassa - Samuelson effect
CLC: F830.7
Type: Master's thesis
Year: 2009
Downloads: 168
Quote: 0
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Abstract


The real exchange rate can be divided into two parts of the real exchange rate of tradable goods and non-tradable goods real exchange rate, which both part of the real exchange rate has important theoretical and practical meanings play a leading role. Engle (1999) empirical conclusions dominate the real exchange rate fluctuations on the real exchange rate of tradable goods in one fell swoop to subvert the traditional understanding of opened up a new field of research of the real exchange rate. From the following three levels, deepening and the preliminary interpretation of this finding. This paper not only reveals the general laws of the sources of real exchange rate fluctuations, and corrected the misunderstanding of the real exchange rate determination mechanism. First, the variance decomposition method, investigated 15 representative countries in 50 years in the general laws of the sources of real exchange rate fluctuations, these two factors have a significant impact economic growth and the exchange rate regime. This discovery often been overlooked in previous studies, but the mystery explained Engle (1999) has important significance. Specifically: a period of rapid economic growth in the non-tradable factors significantly increase the contribution of the real exchange rate fluctuations; period of floating exchange rates, the contribution of the non-tradable factors on the volatility of the real exchange rate is significantly reduced. Subsequently, using the vector auto regression model (SVAR), the real exchange rate fluctuations in the nominal factors and actual factors quantify decomposition, from the angle of impact sources to verify and explain the tradable factors led to fluctuations in the real exchange rate of the reasons. Conclusion: currency and demand factors are the main impact of fluctuations in the real exchange rate sources, both accounting for up to 80%; while generally regarded as the real exchange rate plays a decisive role in the productivity and supply factors, accounting for only about 20%. This provides a possible explanation - Engle (1999) Mystery monetary shocks to the nominal exchange rate and the real exchange rate of tradables fluctuate significantly, and thus dominate the real exchange rate fluctuations. Finally, start from the Balassa - Samuelson effect, analysis of the non-tradable factors of the role of the real exchange rate is minimal, further pointed out that the decision to look at the actual exchange rate mechanism only from the perspective of productivity and other supply is too one-sided. The study found that the Balassa - Samuelson effect is one of the driving factors of the real exchange rate, but its effect was much smaller than the tradeable factor productivity mechanisms are often unable to appear because the forecast change in the actual, but also to productivity exchange rate movements the root causes of the deviation. These studies have shown that: the long-term persistence of the highly fragmented world commodity markets, as well as the sharp fluctuations of the nominal exchange rate, purchasing power parity set up than expected far more difficult, thereby causing the price difference between the tradeables. That being the case, the long-term trend of the real exchange rate is the trade factors and forces the role of non-trade factors two results. Therefore, in determining its exchange rate policy, can not be too much subject to the theory of constraints the PPP and productivity mechanism, but should be more according to their economic needs imposed on the exchange rate impact, which is experiencing a price system with international standards especially in China, has a practical significance.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Exchange
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