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Monetary and real shocks, the business cycle and the value of the euro

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  • Renato Filosa

Abstract

The appreciation of the dollar in the aftermath of the launch of the euro came as a surprise to most observers; furthermore, traditional models do not seem to be able to capture the fluctuations of the dollar/euro exchange rate. Is this a confirmation of earlier research according to which no structural model can explain exchange rate dynamics? More optimistically, this study shows that a structural VAR model of the Mundell-Fleming type well explains the behaviour of the euro and its relationships with the fundamentals. Our estimates indicate that the dollar appreciation is primarily due to the cyclical strength of US demand. By contrast, they do not support the often-voiced theory that the appreciation of the dollar is explained by the "new economy". Finally, the model shows that monetary shocks have limited effects on the exchange rate and very strong ones on inflation.

Suggested Citation

  • Renato Filosa, 2004. "Monetary and real shocks, the business cycle and the value of the euro," BIS Working Papers 154, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:154
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    References listed on IDEAS

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    3. World Bank, 2003. "The World Bank Annual Report 2003," World Bank Publications - Books, The World Bank Group, number 13930.
    4. Richard H. Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
    5. Detken, Carsten & Henry, Jérôme & Smets, Frank & Dieppe, Alistair & Marin, Carmen, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 160, European Central Bank.
    6. World Bank, 2002. "The World Bank Annual Report 2002," World Bank Publications - Books, The World Bank Group, number 13932.
    7. John F. Henry, 1984. "On Equilibrium," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 6(2), pages 214-229, January.
    8. World Bank, 2003. "The World Bank Annual Report 2003," World Bank Publications - Books, The World Bank Group, number 13929.
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    Cited by:

    1. Renato Filosa, 2007. "Stress testing of the stability of the Italian banking system: a VAR approach," Heterogeneity and monetary policy 0703, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica.

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