We extend the empirical SVAR literature on real exchange rates by extracting a common stochastic trend in productivity, interpreted as a permanent world technology shock. Overall, we find that innovations to world technology constitute an important, albeit not the dominant, source of movements in the real euro-dollar exchange rate. First, the dollar appreciates significantly in response to such an impulse. Second, the world technology shock accounts for approximately one-fifth of the variance of the forecast error in the real euro-dollar rate at business-cycle frequencies. Our results are in line with previous studies who find that demand or nominal shocks are the dominant sources of fluctuations in relative prices and provides limited support to productivity-based models of real exchange rate determination.
Euro-Dollar Real Exchange Rate; World Technology Shocks; Structural VAR;
- C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
- F41: Open Economy Macroeconomics
- E32: Business Fluctuations • Cycles
TSE Working Paper, n. 11-261, December 15, 2011