Exchange Rate Regimes and the Sources of Real Exchange Rate Fluctuations: Evidence from East Asia

2015 Fiscal Year Final Research Report

• Project/Area Number: 26780156
• Research Category: Grant-in-Aid for Young Scientists (B)
• Allocation Type: Multi-year Fund
• Research Field: Economic policy
• Research Institution: Meisei University
• Principal Investigator: Vu Tuan Khai 明星大学, 経済学部, 准教授 (80552603)
• Project Period (FY): 2014-04-01 – 2016-03-31
• Keywords: Real exchange rate / Exchange rate regime / VAR / sign restriction / East Asia

Outline of Final Research Achievements

This study investigates how the sources of real exchange rate (RER) fluctuations differ under different exchange rate regimes using data of two East Asian countries: Korea and Thailand. The sources of RER fluctuations are decomposed into supply, demand, monetary, and exchange rate-specific shocks, among which the last captures changes in the RER that are not related to fundamentals. These shocks are identified by means of a structural VAR identified by sign restrictions. We find that exchange rate-specific shocks are much more important to the fluctuations of the RER in a float than in a peg. They are also an important source of fluctuations of the interest rate, output, and the price level. Demand shocks are the most important source of RER fluctuations in both exchange rate regimes. The findings imply a tradeoff tradeoff between the need to allow the exchange rate to adjust to fundamental shocks and the need to limit its undesirable fluctuations that do not come from fundamentals.

Free Research Field

国際金融論、マクロ経済学