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• W309646512 abstract "ABSTRACT The effect of nominal and real shocks to real exchange rates under floating exchange rate system was examined. The real exchange rates in this study were measured in terms of domestic currency relative to the U.S. dollar. Thailand was used as an event study during the economic crisis. Ever since the floating exchange rate system was in effect in the third quarter of 1997, some policymakers have called for policies designed to keep the exchange rate within the target range. A vector autoregression (VAR) was employed to investigate the joint behavior of real and nominal exchange rates in order to identify the nominal and real shocks that caused fluctuations in the real exchange rate. Based upon the results of a bivariate VAR model, the impulse response functions showed that real shocks had a thriving impact on changes in real exchange rates in the twelve- month forecast horizon. Furthermore, variance decompositions revealed that real shocks were much more robust than nominal shocks during the period under study. INTRODUCTION At the pinnacle of the Southeast Asian economic crisis, nominal and real shocks that affect real exchange rate have become more prevalent in macroeconomic policy analysis. Nominal shocks are typically referred to a shock from monetary policy, while real shocks stem from economic fundamentals, such as changes in preferences, productivity, and inflation expectations. If the real shocks to real exchange rate dominate nominal shocks, monetary policy measures alone cannot be used to cope with fluctuations in the real exchange rate, especially in the long run. Nominal exchange rate in Thailand had long been pegged, with occasional interrupting devaluation until the second quarter of 1997. The gradual decline in international reserves coupled with the attack on domestic currency (Thai baht) by speculators forced the Bank of Thailand to float the exchange rate. After entering the floating exchange rate regime, the nominal exchange rate in terms of baht per U.S. dollars depreciated sharply until the end of 1997. Consequently, data from Bank of Thailand (2002) showed that the net flows of portfolio investment, especially investment in equity securities, substantially decreased in 1998. Furthermore, short-term external debts gradually fell from 1997 to 2001. These events might be attributed to the short-run exchange rate risk faced by local and foreign economic agents. In early 1998, the baht began to appreciate and accelerated by the end of the year. In recent years, the nominal exchange rate has fluctuated to a lesser extent with an upward trend. This substantially improved the trade balance. Thus, the country has begun to experience a trade surplus. According to international finance literature (Gan, 1994), movements in the real exchange rate can be viewed as a random walk process during a period of floating nominal exchange rate. Short-term capital flows can cause exchange rate volatility. This phenomenon is common in recent developments in Asia and Latin America. Bodnar, Dumas, and Marston (2002) found that exchange rate changes had a substantial impact on the pricing behavior of exporting and importing firms. One approach to alleviate exchange rate volatility is to measure and investigate the sources of fluctuations in real and nominal exchange rates. REVIEW OF RELATED LITERATURE The studies of movements in real exchange rates are generally related to the notion that prices in different countries move towards equality in common currency term. The empirical works devoted to purchasing power parity (PPP) are motivated by the presence or absence of unit roots in real exchange rates and cointegration between nominal exchange rates and different measures of relative prices, such as wholesale prices versus consumer prices. If the null hypothesis of stationarity for the bilateral real exchange rate or real effective exchange rate is rejected, it is unlikely that PPP will hold. …" @default.
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• W309646512 date "2004-05-01" @default.
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• W309646512 title "Measuring Shocks to Exchange Rate under Floating Regime" @default.
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