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This paper analyses the role of the real exchange rate in a structural vector autoregression framework for the United Kingdom, Euro area, Japan, and Canada vis-á-vis the United States. A new identification strategy is proposed building on sign restrictions. The results are compared to the benchmark conventional approach of Clarida and Gali (1994) based on long-run zero restrictions. Although the restrictions are derived from the same theoretical model, the results are strikingly different. In contrast to the benchmark model, an important role for nominal shocks in explaining real exchange rate fluctuations is found. Hence, the exchange rate can rather be considered as a source of shocks instead of a shock absorber. [ABSTRACT FROM AUTHOR]

This study examines the impact of shocks to exchange rate uncertainty (volatility) on foreign direct investment (FDI) in Canada, Japan, the United Kingdom, and the United States. The analysis is conducted using vector autoregressive models that contain the price level, real output, the real exchange rate, the volatility of the real exchange rate, the interest rate, and FDI. The results from variance decompositions yield public policy implications. In Canada, Japan, and the United States, innovations to exchange rate uncertainty explain significant portions of the forecast error variance in FDI at longer time horizons. The impulse response functions indicate that, to the extent that shocks to exchange rate volatility have an impact on FDI, the impact is positive and takes place with a lag. [ABSTRACT FROM AUTHOR]

This article investigates the interdependence of stock returns and exchange rate changes within the same economy. Six countries were tested for volatility spillovers, namely the U.S., Great Britain, Japan, Germany, Canada and France. Evidence of spillovers from stock returns to exchange rate changes is found for all countries except Germany. These results suggest that the asset approach to exchange rate determination is valid when formulated in terms of the second moments of the exchange rate distribution for these countries. The spillovers from stock returns to exchange rate changes are symmetric in nature. Volatility spillovers from exchange rate changes to stock returns are insignificant for all countries.

This paper has tested a variant of purchasing power parity to determine if exchange rate adjusted price levels between the United States and Japan, the United Kingdom and Canada form a cointegrated system. Tests for cointegration were performed over a time period that spanned both fixed and flexible exchange rates, and for fixed and flexible rate subperiods.
Evidence favorable to PPP is marginal with a number of test statistics bordering on significance at the 0.10 level. What evidence there is comes primarily from the wholesale price index, thus supporting the arbitrage view of PPP over the alternative which stresses the overall purchasing power of money. Comparing periods, the strongest support for cointegration comes from the fixed rate subperiod, when the Japanese and possibly the Canadian WPIs form cointegrated systems with the US WPI. With the possible exception of Canada (WPI), cointegration is rejected for the recent period of flexible exchange rates. [ABSTRACT FROM AUTHOR]