The (UN-) stable relationship between the exchange rate and its fundamentals
AbstractThis study investigates the relationship between the euro--dollar exchange rate and its underlying fundamentals by adopting nonlinear time series modelling. We found that this relationship is episodically unstable. We also found that an equilibrium-distorting shock is likely to have a greater effect on the exchange rate during periods when the deviation between exchange rate and fundamentals is large; as a consequence, when the exchange rate is close to its equilibrium value it tends to be less sensitive to any shocks in the fundamentals.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Economics Letters.
Volume (Year): 15 (2008)
Issue (Month): 7 ()
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Other versions of this item:
- Carlo Altavilla, 2006. "The (Un-) Stable Relationship between The Exchange rate and its Fundamentals," Discussion Papers 6_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
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