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The US Dollar-Euro exchange rate and US-EMU bond yield differentials: A Causality Analysis

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  • Simón Sosvilla-Rivero
  • María del Carmen Ramos-Herrera

Abstract

This paper test for causality between the US Dollar-Euro exchange rate and US-EMU bond yield differentials. To that end, we apply Hsiao (1981)´s sequential procedure to daily data covering the 1999-2011 period. Our results suggest the existence of statistically significant Granger causality running one-way from bond yield differentials to the exchange rate, but not the other way around.

Suggested Citation

  • Simón Sosvilla-Rivero & María del Carmen Ramos-Herrera, 2011. "The US Dollar-Euro exchange rate and US-EMU bond yield differentials: A Causality Analysis," Working Papers 11-01, Asociación Española de Economía y Finanzas Internacionales.
    • Handle: RePEc:aee:wpaper:1101
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    References listed on IDEAS

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    1. Menzie D. Chinn & Guy Meredith, 2004. "Monetary Policy and Long-Horizon Uncovered Interest Parity," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 409-430, November.
    2. Robert P. Flood & Mark P. Taylor, 1996. "Exchange Rate Economics: What's Wrong with the Conventional Macro Approach?," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 261-302, National Bureau of Economic Research, Inc.
    3. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    4. Annika Alexius, 2001. "Uncovered Interest Parity Revisited," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 505-517, August.
    5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    7. Hsiao, Cheng, 1981. "Autoregressive modelling and money-income causality detection," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 85-106.
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    More about this item

    Keywords

    Causality; Exchange rate; Long-term interest rates; Rolling regression;
    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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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