When may depreciations fuel inflation? An application to the Spanish case

In this paper it is considered that the relationship between nominal exchan ge rate and prices depends on the nature of the shocks impacting the econom y. In order to identify the sources of nominal exchange rate and relative p rice fluctuations we impose long-run restrictions on the dynamics of these variables through a 2-variable and 3-variable SVAR, respectively. This meth odology is applied to data on the Spanish economy and find that supply and real demand shocks move nominal exchange rates and relative prices in oppos ite directions. Nominal shocks, however, move both variables in the same di rection. Thus, in this case, only under nominal shocks may exchange rate de preciations fuel inflation.