Accounting for real and nominal exchange rate movements in the post-Bretton Woods period

Abstract

Using the technique developed by Blanchard and Quah, we decompose real and nominal exchange rate movements into the components induced by real and nominal factors. Nominal shocks have had a minor effect on the real and nominal bilateral exchange rates between the US and Canada, Japan and Germany. There is little evidence of exchange rate overshooting. Real demand, rather than supply, shocks have been responsible for volatile exchange rate movements; structural models of exchange rate determination need to consider such shocks as an important ‘fundamental’ determinant.