Recent theoretical and empirical research in international macroeconomics has rediscovered the problem of purchasing power parity (PPP). Empirically, PPP is a bad approximation of both the short-term and medium-term properties of the data. Economists have had difficulties in explaining the persistent misalignments of real exchange rates, but new empirical research by Clarida and Galí (1995) suggests that much of these real exchange rate movements are due to relative demand shocks. The present paper challenges this view by using an extended version of their structural vector autoregressive (SVAR) model in order to identify a larger number of real shocks (labour supply, productivity and aggregate demand) and nominal shocks (money demand and money supply). It is found that whilst some of their results go through in our extended framework, there is serious doubt with respect to the appropriateness of labelling those shocks which drive real exchange rates as aggregate demand disturbances.
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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number
419.
Length: pages Date of creation: Nov 1997 Date of revision: Handle: RePEc:bon:bonsfb:419
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Ahmed, Shaghil & Ickes, Barry W. & Ping Wang & Byung Sam Yoo, 1993.
"International Business Cycles,"
American Economic Review,
American Economic Association, vol. 83(3), pages 335-59, June.
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Other versions:
Ahmed, S. & Ickes, B. & Wang, P. & Yoo, S., 1989.
"International Business Cycles,"
Papers
7-89-4, Pennsylvania State - Department of Economics.
Matthew Shapiro & Mark Watson, 1988.
"Sources of Business Cycles Fluctuations,"
NBER Chapters,
in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156
National Bureau of Economic Research, Inc.
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