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Nigeria Journal for Engineering
This paper clarifies the concept of macroeconomic shocks affecting real exchange rate. Four structural shocks are identified; nominal, relative demand, supply and oil price shocks. The short run and long run impact of these shocks on relative output, relative price, real exchange rate fluctuations are broadly consistent with the implications of the Mundel - Fleming - Dornbusch type model that provide the necessary backdrop for the identification restrictions used in this work. The identified shocks suggest that long term movement in real exchange rate has been primarily driven by relative demand shock that has played significant role in explaining episodes of appreciation/depreciation of real exchange rate and how it led to significant changes in the implied equilibrium exchange rate. However, while monetary shocks do not affect the long run real exchange rate, in the short-run they seem to have had an expansionary effect that led to appreciating pressure on the exchange rate. The finding that real shocks are predominant in driving real exchange rate movements implies that policy makers need to focus more on the factors that drive the real side of the economy in order to stabilize the foreign exchange market.