ACCOUNTING FOR REAL AND NOMINAL EXCHANGE-RATE MOVEMENTS IN THE POST-BRETTON WOODS PERIOD

Using the technique developed by Blanchard and Quah, we decompose real and nominal exchange rate movements into the components induced by re al and nominal factors. Nominal shocks have had a minor effect on the real and nominal bilateral exchange rates between the US and Canada, J apan and Germany. There is little evidence of exchange rate overshooti ng. Real demand, rather than supply, shocks have been responsible for volatile exchange rate movements; structural models of exchange rate d etermination need to consider such shocks as an important 'fundamental ' determinant. (C) 1997 Elsevier Science Ltd.