The behavior of the real exchange rate under fixed and floating exchange rate regimes

This article investigates the behavior of real exchange rates under fixed a nd flexible exchange rates. Using data from both the Bretton Woods and the modern floating periods, we decompose real exchange rate movements into com ponents attributable to supply shocks, real demand shocks, monetary shocks, capital flows shocks, and real oil price shocks. Empirical results show th at real demand shocks are an important source of real exchange rate movemen ts under both fixed and flexible rates, while monetary shocks are negligibl e. Supply and oil price shocks seem to be more important under Bretton Wood s, while capital flows shocks seem to explain a relatively higher proportio n of real exchange rate movements under the modern floating period.