Sources of real exchange rate fluctuations in the Nordic countries

In an attempt to move beyond the purchasing power parity hypothesis, this p aper addresses two issues. The first concerns the causes of movements in re al exchange rates. In contrast to the typical result, supply shocks are fou nd to dominate the long-run variance decompositions for each of the four No rdic countries under study. This suggests that productivity developments ar e the most important determinant of long-run movements in real exchange rat es. A second topic is the relative importance of stationary and non-station ary components of real exchange rates. Also in contrast to previous finding s, transitory shocks are more important than permanent shocks for three of the four countries.