The effects of nominal shocks on the real exchange rate /

• Main Author: Abbey, Laurie-Ann Cecilia
• Format: Others
• Language: en
• Published: McGill University 1991
• Subjects: Foreign exchange rates > Canada; Foreign exchange rates > United States
• Online Access: http://digitool.Library.McGill.CA:80/R/?func=dbin-jump-full&object_id=61180

This study focuses on the effects of nominal shocks on the real exchange rate. The model used to determine the effects of a monetary expansion on the real exchange rate assumes instantaneously clearing asset markets and sticky goods prices. A monetary expansion causes the nominal exchange rate to initially overshoot its long run equilibrium value followed by a series of appreciations. The real exchange rate depreciates sharply and then appreciates until its initial value is restored. === A simple monetary model, a sticky price monetary model and a random walk model are empirically tested with Canadian/U.S. data over the 1972-1989 time period. Both monetary models were rejected and the random walk model represented the best fit to the data. This evidence supports the hypothesis that the Canadian/U.S. nominal exchange rate follows a random walk process. === An empirical examination of the Canadian real exchange rate over the 1970-1989 period confirms the hypothesis that since the advent of the floating exchange rate period, the Canadian real exchange rate movements have been much larger than most economists predicted.