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.
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.:
- Charles Engel & Nelson C. Mark & Kenneth D. West, 2008.
"Exchange Rate Models Are Not As Bad As You Think,"
in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441
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.).
- Richard Meese & Kenneth Rogoff, 1983. "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 67-112 National Bureau of Economic Research, Inc.
- Richard Meese & Kenneth Rogoff & Jacob Frenkel, . "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," Working Paper 32044, Harvard University OpenScholar.
- 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.
- 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.
- 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.
- 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.
- Ron Alquist & Menzie D. Chinn, 2002. "Productivity and the Euro-Dollar Exchange Rate Puzzle," NBER Working Papers 8824, National Bureau of Economic Research, Inc.
- 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.
- Meese, R. & Rogoff, K., 1988. "Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period," Working papers 368, Wisconsin Madison - Social Systems.
- 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.
- Salvatore, Dominick, 2005. "The euro-dollar exchange rate defies prediction," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 455-464, June.
- 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.
- 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," Development Research Unit Working Paper Series 14/06, Monash University, Department of Economics.
- 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.
- Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
- 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.
- 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.
- 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.
- 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.
- Susana Garcia Cervero & J. Humberto Lopez & Enrique Alberola Ila & Angel J. Ubide, 1999. "Global Equilibrium Exchange Rates," IMF Working Papers 99/175, International Monetary Fund.
- Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2001.
"Determinants of the euro real effective exchange rate: a BEER/PEER approach,"
- 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.
- 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.
- 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.
- 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.
- Morley, Bruce, 2009. "Exchange Rates and Stock Prices in the Long Run and Short Run," Department of Economics Working Papers 15973, University of Bath, Department of Economics.
- repec:eid:wpaper:5/09 is not listed on IDEAS
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.