Title: On the importance of supply shocks for real exchange rates: A fresh view from the frequency-domain
Authors: Fang Yao - Reserve Bank of New Zealand (New Zealand)
Britta Gehrke - University of Erlangen-Nuremberg (Germany) [presenting]
Abstract: The role of supply shocks for real exchange rate fluctuations is re-examined and insights from the frequency domain perspective are exploited. In contrast to the existing literature, we find that supply shocks are one important driver of US real effective exchange rate fluctuations at low frequencies, while real demand shocks matter the most at high and medium frequencies. In addition, we propose an approach to structurally decompose the persistence of the real exchange rate and find that supply shocks explain up to half of its persistence.