TY  - JOUR
AU  - Clarida,Richard
AU  - Gali,Jordi
TI  - Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4658
PY  - 1994
Y2  - February 1994
UR  - http://www.nber.org/papers/w4658
L1  - http://www.nber.org/papers/w4658.pdf
N1  - Author contact info:
Richard H. Clarida
Columbia University
420 West 118th Street
Room 1111, IAB
New York, NY  10027
Tel: 212/854-3676
Fax: 212/854-8059
E-Mail: rhc2@columbia.edu

Jordi Gali
Centre de Recerca en Economia Internacional (CREI)
Ramon Trias Fargas 25
08005 Barcelona
SPAIN
Tel: 011-34-93-5422754
Fax: 011-34-93-5421860
E-Mail: jgali@crei.cat
AB  - This paper investigates empirically and attempts to identify the sources of real exchange rate fluctuations since the collapse of Bretton Woods.  The paper's first two sections survey and extend earlier, non-structural empirical work on this subject by Campbell and Clarida (1987), Meese and Rogoff (1988), and Cumby and Huizinga (1990).  The paper's main contribution is to build and estimate a three equation open macro model in the spirit of Dornbusch (1976) and Obstfeld (1985) and to identify the model's structural shocks - to demand, supply, and money -using the approach pioneered by Blanchard and Quah (1989).  For two of the four countries we study, Germany and Japan, our structural estimates imply that monetary shocks, to money supply as well as to the demand for real money balances, explain a substantial amount of the variance of real exchange rates relative to the dollar.  We find that demand shocks, to national saving and investment, explain the majority of the variance in real exchange rate fluctuations, while supply shocks explain very little.  The model's estimated short run dynamics are strikingly consistent with the predictions of the simple textbook Mundell-Fleming model.
ER  -