A re-examination of the impacts of macroeconomic and financial shocks on real exchange rate fluctuation: evidence from G7 and Asian countries

Wong, D. K. T. (2020) A re-examination of the impacts of macroeconomic and financial shocks on real exchange rate fluctuation: evidence from G7 and Asian countries. Applied Economics, 52(50), pp. 5491-5515. (doi: 10.1080/00036846.2020.1765962)

Abstract

This paper aims to investigate the sources of real exchange rate fluctuation by utilizing sign restrictions in structural vector autoregressive (SVAR) method. Under an agnostic identification scheme, the empirical results show that the delayed overshooting puzzle still exists in response to monetary shock even if price puzzle is ruled out by construction. In contrast, all countries experience a significant initial real depreciation, and then gradually appreciate in response to currency risk premium (CRP) shock. This finding is consistent with Dornbusch’s overshooting model. In addition, I examine the importance of investors’ expectations in determining the short-term variations in the real exchange rate. The results indicate that the CRP and expectation shocks obviously outperformed the demand, supply and monetary shocks in terms of explaining the real exchange rate fluctuation.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Wong, Kai
• Authors: Wong, D. K. T.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Applied Economics
• Publisher: Taylor & Francis
• ISSN: 0003-6846
• ISSN (Online): 1466-4283
• Published Online: 01 June 2020
• Copyright Holders: Copyright © 2020 Informa UK Limited
• First Published: First published in Applied Economics 52(50):5491-5515
• Publisher Policy: Reproduced in accordance with the publisher copyright policy