Nominal Shocks and Real Exchange Rate Fluctuations

I analyze the role of nominal and real shocks on the exchange rate behavior using a structural vector autoregressive model (sVAR) for the US vis-à-vis the rest of the world. I estimate the contribution of various shocks to explaining the movement of the real dollar exchange rate, imposing two alternative identi\u85ca-tion strategies based on theoretical restrictions derived from an open economy macro model. Using zero long-run restrictions I \u85nd that nominal shocks are unimportant to explain real exchange rate uctuations. I compare this result to an identi\u85cation strategy based on sign restrictions proposed by Fry and Pagan (2007). The results show that although monetary policy shocks are not the main drivers of exchange rate uctuations, they are nevertheless important. The range for their short-horizon contribution is 37 % to 47%