Abstract
This paper empirically investigates the sources of fluctuations in real and nominal Mongolian Tugrik (MNT) exchange rates by estimating the structural vector autoregressive (SVAR) model over the period January 1994–May 2021 and decomposing the exchange rate series into stochastic components induced by real and nominal shocks under the assumption of the long-run neutrality of nominal shocks on the real exchange rate level. The empirical results show that the real MNT exchange rate movements are primarily due to the real shocks, while the nominal shocks have a major role in explaining nominal exchange rate movements in the short and long run. The nominal exchange rate shows a delayed over-shooting occurring between one and three years after a nominal shock hits the economy. The long-run effect of a monthly one standard deviation nominal shock on nominal MNT exchange rate is 2.5%, which results in a permanent divergence between real and nominal MNT exchange rate and causes non-cointegrated relation between real and nominal MNT exchange rates. The historical decomposition of forecast error indicates that the nominal shock plays a significant role in explaining the depreciation in nominal MNT exchange rate over the last three decades. Our recommendation is to stop “cash handling” policy, minimize monetary shock, and coordinate fiscal and monetary policies to avoid large nominal depreciation.
Highlights
Exchange rate may be the most discussed topic in international economics
Their results suggest that real shocks play a significant role in explaining real exchange rate movements, while nominal shocks play a significant role in explaining price level movements in Saudi Arabia
Since we identify b12 from long-run restriction, the remaining three structural parameters are just identified from the following system of three equations by substituting the value of b12 into the system (8a)–(8c)
Summary
Exchange rate may be the most discussed topic in international economics. Numerous papers haven been written in this field since the collapse of the Bretton Woods system, and the study dimensions have been expanding rapidly. Lastrapes (1992) first studied the exchange rate fluctuations of six advanced economies by decomposing exchange rate series into real and nominal components by identifying real and nominal shocks using a bivariate structural vector autoregressive (SVAR) model under the assumption of long-run neutrality of nominal shocks on the real exchange rate level. To the best of our knowledge, this type of study has not yet been conducted for the Mongolian Tugrik (MNT) exchange rate, which has depreciated substantially over the last three decades (Figure 1). 2017, andrecently (2) to other managed from(1)crawl-like, effective floating, 18 September and (2) toMonetary other managed from crawl-like, effective Under this background, the identification of driving sources of MNT exchange rate depreciation is background, the identification of driving sources. Rate and Author’s estimation estimation based based on on publicly publicly available available data data from from
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