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Exchange rates and fundamentals: A bootstrap panel data analysis

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  • Xie, Zixiong
  • Chen, Shyh-Wei

Abstract

This study attempts to re-examine the Granger non-causality from exchange rates to observed fundamentals based on the present value model of Engel and West (2005). To this end, we employ the bootstrap panel Granger non-causality analysis, which allows us to untangle the causal nexus between exchange rates and fundamentals in panel data. Among the main results, it is found that the null hypothesis of no cross-sectional dependence across the members of the panel is strongly rejected, indicating that the bootstrap critical value is required in conducting the panel Granger non-causality test. The null hypothesis of Granger non-causality running from the fundamentals to exchange rates is significantly rejected, implying that the monetary approach of exchange rate determination is a useful benchmark to understand the evolution of the exchange rate. Empirical evidences also show that exchange rates Granger-case the fundamentals, supporting the view that exchange rates are determined as the present value that depends in part on observed fundamentals.

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  • Xie, Zixiong & Chen, Shyh-Wei, 2019. "Exchange rates and fundamentals: A bootstrap panel data analysis," Economic Modelling, Elsevier, vol. 78(C), pages 209-224.
    • Handle: RePEc:eee:ecmode:v:78:y:2019:i:c:p:209-224
    DOI: 10.1016/j.econmod.2018.09.021
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    15. Bekiros, Stelios D., 2014. "Exchange rates and fundamentals: Co-movement, long-run relationships and short-run dynamics," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 117-134.
    16. Uz, Idil & Ketenci, Natalya, 2008. "Panel analysis of the monetary approach to exchange rates: Evidence from ten new EU members and Turkey," Emerging Markets Review, Elsevier, vol. 9(1), pages 57-69, March.
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    More about this item

    Keywords

    Exchange rate; Fundamental; Bootstrap; Panel model; Granger non-causality;
    All these keywords.

    JEL classification:

    • 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
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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