We analyze the sources of changes in nominal and real rates of exchange between six European currencies and the U.S. dollar. We conclude that over the period 1973-1979 unexpected changes in the price of oil, together with unanticipated monetary shocks at home or in the U.S. were the most important causes of changes in exchange rates. A multi-state Kalman filter technique is used to compute empirical proxies for unanticipated changes in the exogenous variables. Since both oil price shocks and changes in U.S. monetary trends effect the European currencies in different degrees, it follows that differential domestic rates of inflation are not the only reason why arrangements to restrict exchange rate fluctuations, such as the European Monetary System, may run into trouble.
|Number of pages||38|
|Journal||Journal of Monetary Economics|
|Publication status||Published - 1983|