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Third-country effects on the exchange rate

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  • Berg, Kimberly A.
  • Mark, Nelson C.

Abstract

Predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries. These regressions characteristically have low explanatory power, which leaves room for an omitted variables interpretation. We test whether these omitted variables are from third-countries. When third-country macro factors are added to bilateral exchange rate regressions, they enter significantly and increase the adjusted R2. A three-country exchange rate model illustrates potential channels for third-country spillovers to affect the bilateral rate.

Suggested Citation

  • Berg, Kimberly A. & Mark, Nelson C., 2015. "Third-country effects on the exchange rate," Journal of International Economics, Elsevier, vol. 96(2), pages 227-243.
    • Handle: RePEc:eee:inecon:v:96:y:2015:i:2:p:227-243
    DOI: 10.1016/j.jinteco.2015.03.003
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    4. Joscha Beckmann & Robert Czudaj, 2017. "Effective Exchange Rates, Current Accounts and Global Imbalances," Review of International Economics, Wiley Blackwell, vol. 25(3), pages 500-533, August.
    5. Daniel M. Bernhofen & Markus Eberhardt & Jianan Li & Stephen Morgan, 2015. "Assessing Market (Dis)Integration in Early Modern China and Europe," CESifo Working Paper Series 5580, CESifo.
    6. Tarek A Hassan & Rui C Mano, 2019. "Forward and Spot Exchange Rates in a Multi-Currency World," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(1), pages 397-450.
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    More about this item

    Keywords

    Exchange rates; Disconnect puzzle; Multi-country model;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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