LAUSR

This paper re-examines the role of supply shocks for real exchange rate fluctuations and contributes by exploiting insights from the frequency-domain perspective. In contrast to the existing literature, our empirical findings point towards an important role played by supply (productivity) shocks in driving US real effective exchange rate fluctuations at low frequencies, while real demand shocks matter mostly at high and medium frequencies. In addition, we propose an approach to structurally decompose the persistence of the real exchange rate and find that supply shocks explain up to half of its persistence.