Working Paper Series,
Uppsala University, Department of Economics

Abstract: This paper presents a model yielding testable implications concerning the long-run co-movements of real exchange rates, relative productivity, the trade balance and terms of trade. Countries with higher productivity, trade deficits or improved terms of trade are found to have more appreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods. Exogenous terms of trade shocks are found to be the most important determinant of long run movements in the real exchange rate for Denmark and Norway, while demand shocks account for most of the long run variance in the real exchange rate for Finland and Sweden.

Keywords: Real exchange rates; cointegration; variance decomposition

JEL-codes: F31; F32; F41

33 pages, August 18, 2002

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Published as

Anders Bergvall, (2004), 'What Determines Real Exchange Rates? The Nordic Countries', Scandinavian Journal of Economics, vol 106, no 2, pages 315-337

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