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In Search of Dominant Drivers of the Real Exchange Rate

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Abstract

We uncover the major drivers of macro aggregates and the real exchange rate at business cycle frequencies in Group of Seven countries. The estimated main drivers of key macro variables resemble each other and account for a modest fraction of the real exchange rate variances. Dominant drivers of the real exchange rate are orthogonal to main drivers of business cycles, generate a significant deviation of the uncovered interest parity condition, and lead to small movements in net exports. We use these facts to evaluate international business cycle models accounting for the dynamics of both macro aggregates and the real exchange rate.

Suggested Citation

  • Wataru Miyamoto & Thuy Lan Nguyen & Hyunseung Oh, 2023. "In Search of Dominant Drivers of the Real Exchange Rate," International Finance Discussion Papers 1373, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1373
    DOI: 10.17016/IFDP.2023.1373
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    More about this item

    Keywords

    Real exchange rate; International business cycles; Uncovered interest parity;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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