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Real and Nominal Shocks to Exchange Rates: Does the Regime Matter?

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  • Liam A. Gallagher
  • Ella Kavanagh

Abstract

In this paper we investigate the source of Irish real and nominal exchange rate movements during the Exchange Rate Mechanism period. A restricted vector autoregression is employed to decompose Irish pound exchange rate movements into changes due to real and nominal factors, for three bilateral exchange rates—sterling–Irish pound, mark–Irish pound and dollar–Irish pound. The pattern of nominal exchange rate overshooting in response to nominal shocks and the relative importance of nominal shocks as drivers of nominal exchange rates differ between the flexible regime (sterling–Irish pound and dollar–Irish pound) and the target zone arrangement (mark–Irish pound). In contrast real shocks predominantly explain variations in real exchange rates and are independent of the exchange rate regime.

Suggested Citation

  • Liam A. Gallagher & Ella Kavanagh, 2002. "Real and Nominal Shocks to Exchange Rates: Does the Regime Matter?," Manchester School, University of Manchester, vol. 70(5), pages 710-730, September.
    • Handle: RePEc:bla:manchs:v:70:y:2002:i:5:p:710-730
    DOI: 10.1111/1467-9957.00321
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    Cited by:

    1. Ana Luísa Gouvêa Abras & Rodrigo Marino Sekkel, 2003. "Choques Nominais e Reais na Taxa de Câmbio: Evidência Empírica para o Brasil Pós Desvalorização de 1999," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31st Brazilian Economics Meeting] c48, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

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