When May Peseta Depreciations Fuel Inflation?

In this paper we consider that the relationship between nominal exchange rate and prices depends on the nature of the shocks impacting the economy. In order to identify the sources of nominal exchange rate and relative price fluctuations in Spain we impose long-run restrictions on the dynamics of these variables through a 2-variable and 3-variable SVAR, respectively. According to our results, supply and real demand shocks move nominal exchange rates and relative prices in opposite directions. Nominal shocks, however, move both variables in the same direction.