Global and country-specific factors in real effective exchange rates

Nagayasu, Jun (2015): Global and country-specific factors in real effective exchange rates.

Abstract

Using the Bayesian factor model, we decompose movements in real effective exchange rates, which can be considered a measure of external competitiveness, into global and country-specific factors. In data from a number of developed and developing countries, we find a particular global trend in these rates, but a substantial proportion of the variation in these rates is found to be country-specific. In addition, consistent with economic theory, this global factor is closely related to a trend in the global interest rate, while country-specific factors to idiosyncratic movements in countries’ own interest rates.

• Item Type: MPRA Paper
• Language: English
• Keywords: Real effective exchange rates, factor model, variance decomposition, external competitiveness
• Subjects: F - International Economics > F0 - General > F01 - Global Outlook; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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