Working Paper

In Search of Dominant Drivers of the Real Exchange Rate


Abstract: We uncover the major drivers of each macroeconomic variable and the real exchange rate at the business cycle frequency in G7 countries. In each country, the main drivers of key macro variables resemble each other and none of those account for a large fraction of the real exchange rate variances. We then estimate the dominant driver of the real exchange rate and find that (i) the shock is largely orthogonal to macro variables and (ii) the shock generates a significant deviation of the uncovered interest parity condition. We analyze international business cycle models that are consistent with our findings.

Keywords: real exchange rate; international business cycles; uncovered interest parity;

JEL Classification: E32; F31;

https://doi.org/10.24148/wp2022-09

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2022-04-13

Number: 2022-09

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