Do market fundamentals determine the Dollar–Euro exchange rate?
AbstractThe study searches for an optimal Dollar–Euro exchange rate policy for the US and the Euro Area (EA) countries. To achieve this, it explores the causal links between the US Dollar–Euro exchange rate and three key macroeconomic variables. The empirical investigation is carried out in an Error Correction Vector Autoregressive (ECVAR) framework based on the theory of cointegration and error-correction representation of cointegrated variables. The results provide evidence in favor of the presence of a long-run relationship between the exchange rate and the spread between US and EA (Eurozone) interest rates. With respect to the direction of causality, the empirical findings show that in the long and short-run there is a uni-directional causal relationship between interest-rate spreads and the US Dollar–Euro exchange rate. This result constitutes a strong message for policy advising to fiscal and monetary authorities on both sides of the Atlantic, and beyond.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Policy Modeling.
Volume (Year): 34 (2012)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505735
US Dollar–Euro exchange rate; Macroeconomic factors; Error Correction Vector Autoregressive model; Causality tests;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2001.
"Determinants of the euro real effective exchange rate: a BEER/PEER approach,"
Working Paper Series
0085, European Central Bank.
- Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2002. "Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 437-461, December.
- Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2001. "Determinants of the euro real effective exchange rate: a BEER/PEER approach," International Finance 0111003, EconWPA.
- Charles Engel & Nelson C. Mark & Kenneth D. West, 2007.
"Exchange Rate Models Are Not as Bad as You Think,"
NBER Working Papers
13318, National Bureau of Economic Research, Inc.
- Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 343-361, March.
- Nautz, Dieter & Offermanns, Christian J., 2006. "Does the Euro follow the German Mark? Evidence from the monetary model of the exchange rate," European Economic Review, Elsevier, vol. 50(5), pages 1279-1295, July.
- Mussa, Michael, 2007. "The dollar and the current account deficit: How much should we worry?," Journal of Policy Modeling, Elsevier, vol. 29(5), pages 691-696.
- Ron Alquist & Menzie D. Chinn, 2002. "Productivity and the Euro-Dollar Exchange Rate Puzzle," NBER Working Papers 8824, National Bureau of Economic Research, Inc.
- Clostermann, Jörg & Schnatz, Bernd, 2000. "The determinants of the euro-dollar exchange rate: synthetic fundamentals and a non-existing currency," Discussion Paper Series 1: Economic Studies 2000,02, Deutsche Bundesbank, Research Centre.
- Meese, R. & Rogoff, K., 1988.
"Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period,"
368, Wisconsin Madison - Social Systems.
- Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-48, September.
- Salvatore, Dominick, 2005. "The euro-dollar exchange rate defies prediction," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 455-464, June.
- Sarno, Lucio & Valente, Giorgio, 2008.
"Exchange Rates and Fundamentals: Footloose or Evolving Relationship?,"
CEPR Discussion Papers
6638, C.E.P.R. Discussion Papers.
- Lucio Sarno & Giorgio Valente, 2009. "Exchange Rates and Fundamentals: Footloose or Evolving Relationship?," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 786-830, 06.
- Richard Meese & Kenneth Rogoff, 1983.
"The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?,"
in: Exchange Rates and International Macroeconomics, pages 67-112
National Bureau of Economic Research, Inc.
- Richard Meese & Kenneth Rogoff, 1982. "The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?," International Finance Discussion Papers 204, Board of Governors of the Federal Reserve System (U.S.).
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Molodtsova, Tanya & Papell, David H., 2009. "Out-of-sample exchange rate predictability with Taylor rule fundamentals," Journal of International Economics, Elsevier, vol. 77(2), pages 167-180, April.
- repec:eid:wpaper:15973 is not listed on IDEAS
- repec:eid:wpaper:5/09 is not listed on IDEAS
- McKinnon, Ronald I., 2005. "Trapped by the international dollar standard," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 477-485, June.
- Mussa, Michael, 2005. "The euro and the dollar 6 years after creation," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 445-454, June.
- Rogoff, Kenneth, 1999. "Monetary Models of Dollar/Yen/Euro Nominal Exchange Rates: Dead or Undead?," Economic Journal, Royal Economic Society, vol. 109(459), pages F655-59, November.
- Kenneth Rogoff, 2009. "Exchange rates in the modern floating era: what do we really know?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(1), pages 1-12, April.
- Eichengreen, Barry, 2005. "Europe, the euro and the ECB: Monetary success, fiscal failure," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 427-439, June.
- Heng Chen & Dietrich K. Fausten & Wing-Keung Wong, 2006. "Evolution Of Dollar/Euro Exchange Rate Before And After The Birth Of Euro And Policy Implications," Monash Economics Working Papers 14/06, Monash University, Department of Economics.
- Issing, Otmar, 2005. "The ECB and the euro--the first 6 years: A view from the ECB," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 405-420, June.
- Salvatore, Dominick, 2005. "The euro, the dollar and the international monetary system: Editor's introduction," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 401-404, June.
- Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
- Kim, Young Se, 2009. "Exchange rates and fundamentals under adaptive learning," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 843-863, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.