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A risk-driven approach to exchange rate modelling

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  • Kębłowski, Piotr
  • Welfe, Aleksander

Abstract

The paper presents a new approach to exchange rate modelling that augments the CHEER model with a sovereign credit default risk as perceived by financial investors making their decisions. In the cointegrated VAR system with nine variables comprised of the short- and long-term interest rates in Poland and the euro area, inflation rates, CDS indices and the zloty/euro exchange rate, four long-run relationships were found. Two of them link term spreads with inflation rates, the third one describes the exchange rate and the fourth one explains the inflation rate in Poland. Transmission of shocks was analysed by common stochastic trends. The estimation results were used to calculate the zloty/euro equilibrium exchange rate.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 4 ()
Pages: 1473-1482

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:4:p:1473-1482

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Exchange rate modelling; Sovereign credit default risk; CDS spread; International parities; Equilibrium exchange rate;

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References

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Cited by:
  1. Piotr Kębłowski, 2011. "The Behaviour of Exchange Rates in the Central European Countries and Credit Default Risk Premiums," Central European Journal of Economic Modelling and Econometrics, CEJEME, CEJEME, vol. 3(4), pages 221-236, December.
  2. Abdul Rashid & Mashael Bin Saedan, 2014. "Financial crisis and exchange rates in emerging economies: An empirical analysis using PPP-UIP-Framework," Business and Economic Horizons (BEH), Prague Development Center, Prague Development Center, vol. 9(4), pages 86-96, January.

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