Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 90: Sources of Real Exchange Rate Fluctuations in the Nordic Countries

Annika Alexius
Additional contact information
Annika Alexius: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: In an attempt to move beyond the purchasing power parity hypothesis, this paper studies two issues. First, the causes of movements of real exchange rates are investigated. In contrast to the typical result, supply shocks are found to dominate the long-run variance decompositions for all countries. This suggests that productivity developments are the most important determinant of long-run movements in real exchange rate. A second topic is the relative importance of stationary and non-stationary components of real exchange rates. Also in contrast to previous findings, transitory shocks are more important than permanent shocks for three of the four countries.

Keywords: Real exchange rate; Purchasing power parity; Nordic countries

JEL-codes: E50

22 pages, September 1, 1999

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