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A dynamic econometric analysis of the dollar-pound exchange rate in an era of structural breaks and policy regime shifts

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  • Castle, Jennifer L.
  • Kurita, Takamitsu

Abstract

We employ a newly-developed partial cointegration system allowing for level shifts to examine whether economic fundamentals form the long-run determinants of the dollar-pound exchange rate over a recent period characterised by structural breaks and policy regime shifts. The paper models both long-run and short-run dynamic features of the exchange rate using a set of economic variables that explicitly reflect quantitative monetary policy and the influence of a forward exchange market. Out-of-sample forecasts comparing the model with economic fundamentals to benchmarks including the random walk indicate that fundamentals can help at short horizons but less so at longer horizons.

Suggested Citation

  • Castle, Jennifer L. & Kurita, Takamitsu, 2021. "A dynamic econometric analysis of the dollar-pound exchange rate in an era of structural breaks and policy regime shifts," Journal of Economic Dynamics and Control, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:dyncon:v:128:y:2021:i:c:s0165188921000749
    DOI: 10.1016/j.jedc.2021.104139
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    More about this item

    Keywords

    Exchange rates; Unconventional monetary policies; Structural breaks; Economic fundamentals; General-to-specific approach; Partial cointegrated vector autoregressive models;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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