Abstract
We first show that the solution to the real exchange rate under the Taylor rule with interest rate smoothing can have two alternative representations—one based on a first-order difference equation and the other based on a second-order difference equation. Then, by comparing error terms from these two alternative representations and analyzing their second moments, we evaluate the relative importance of Taylor-rule fundamentals, monetary policy shocks, and risk-premium shocks in the dynamics of the real exchange rate. Empirical results suggest that the risk-premium shock is the largest contributor to real exchange rate movements for all the countries examined, with the Taylor-rule fundamentals and monetary policy shocks playing a limited role. These results are robust to various alternative sets of parameter values considered for the Taylor rule with interest rate smoothing.
| Original language | English |
|---|---|
| Journal | Review of International Economics |
| DOIs | |
| Publication status | Accepted/In press - 2018 Jan 1 |
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ASJC Scopus subject areas
- Geography, Planning and Development
- Development
Cite this
Real exchange rate dynamics : Relative importance of Taylor-rule fundamentals, monetary policy shocks, and risk-premium shocks. / Kim, Chang-Jin; Park, Cheolbeom.
In: Review of International Economics, 01.01.2018.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Real exchange rate dynamics
T2 - Relative importance of Taylor-rule fundamentals, monetary policy shocks, and risk-premium shocks
AU - Kim, Chang-Jin
AU - Park, Cheolbeom
PY - 2018/1/1
Y1 - 2018/1/1
N2 - We first show that the solution to the real exchange rate under the Taylor rule with interest rate smoothing can have two alternative representations—one based on a first-order difference equation and the other based on a second-order difference equation. Then, by comparing error terms from these two alternative representations and analyzing their second moments, we evaluate the relative importance of Taylor-rule fundamentals, monetary policy shocks, and risk-premium shocks in the dynamics of the real exchange rate. Empirical results suggest that the risk-premium shock is the largest contributor to real exchange rate movements for all the countries examined, with the Taylor-rule fundamentals and monetary policy shocks playing a limited role. These results are robust to various alternative sets of parameter values considered for the Taylor rule with interest rate smoothing.
AB - We first show that the solution to the real exchange rate under the Taylor rule with interest rate smoothing can have two alternative representations—one based on a first-order difference equation and the other based on a second-order difference equation. Then, by comparing error terms from these two alternative representations and analyzing their second moments, we evaluate the relative importance of Taylor-rule fundamentals, monetary policy shocks, and risk-premium shocks in the dynamics of the real exchange rate. Empirical results suggest that the risk-premium shock is the largest contributor to real exchange rate movements for all the countries examined, with the Taylor-rule fundamentals and monetary policy shocks playing a limited role. These results are robust to various alternative sets of parameter values considered for the Taylor rule with interest rate smoothing.
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UR - http://www.scopus.com/inward/citedby.url?scp=85052970760&partnerID=8YFLogxK
U2 - 10.1111/roie.12372
DO - 10.1111/roie.12372
M3 - Article
JO - Review of International Economics
JF - Review of International Economics
SN - 0965-7576
ER -