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Testing the Equilibrium Exchange Rate Model - Updated

Author

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  • Guilherme, Moura
  • Sergio, Da Silva

Abstract

We find favorable evidence for the textbook equilibrium exchange rate model of Stockman (1987) using Blanchard and Quah’s (1989) decomposition. Real shocks are shown to account for more than 90 percent of movements in the real exchange rate between Brazil and the US, and for more than half of nominal exchange rate changes. Impulse response functions also suggest that real shocks alter these countries’relative prices.

Suggested Citation

  • Guilherme, Moura & Sergio, Da Silva, 2006. "Testing the Equilibrium Exchange Rate Model - Updated," MPRA Paper 1871, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:1871
    as

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    File URL: https://mpra.ub.uni-muenchen.de/1871/1/MPRA_paper_1871.pdf
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    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-698, August.
    3. 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.
    4. Guilherme Moura & Sergio Da Silva, 2005. "Testing the Equilibrium Exchange Rate Model," International Finance 0505018, University Library of Munich, Germany.
    5. Martin D. D. Evans & James R. Lothian, 2017. "The Response of Exchange Rates to Permanent and Transitory Shocks under Floating Exchange Rates," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 1, pages 3-38, World Scientific Publishing Co. Pte. Ltd..
    6. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    7. S Da Silva, 2002. "A Classroom Guide to the Equilibrium Exchange Rate Model," Economic Issues Journal Articles, Economic Issues, vol. 7(2), pages 1-10, September.
    8. Enders, Walter & Lee, Bong-Soo, 1997. "Accounting for real and nominal exchange rate movements in the post-Bretton Woods period," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 233-254, April.
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    More about this item

    Keywords

    Equilibrium Exchange Rate Model; Blanchard and Quah’s Decomposition;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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