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Currency Spillovers and Tri-Polarity: A Simultaneous Model of the US Dollar, German Mark and Japanese Yen

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  • MacDonald, Ronald
  • Marsh, Ian W

Abstract

This paper presents a simultaneous model of exchange rates between the three major countries. In addition to incorporating long-run equilibria and short-run dynamics, the model is designed to capture complex interactions between currencies not normally considered in exchange rate models. These interactions are shown to be important via generalised impulse response analysis, and the model as a whole to be an economically and statistically superior forecasting tool over relatively short horizons.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2210.

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Date of creation: Aug 1999
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Handle: RePEc:cpr:ceprdp:2210

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Related research

Keywords: Exchange Rates; Forecasting; Impulse Response; PPP Exchange Rate Rules; Spillovers;

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References

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  1. R Macdonald, . "Long Run Purchasing Power Parity: Is It For Real?," Dundee Discussion Papers in Economics 029, Economic Studies, University of Dundee.
  2. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  3. Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, vol. 69(1), pages 211-240, September.
  4. Fisher, P G, et al, 1990. "Econometric Evaluation of the Exchange Rate in Models of the UK Economy," Economic Journal, Royal Economic Society, vol. 100(403), pages 1230-44, December.
  5. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  6. Ronald MacDonald & Luca Antonio Ricci, 2001. "PPP and the Balassa Samuelson Effect," IMF Working Papers 01/38, International Monetary Fund.
  7. Katarina Juselius & Ronald MacDonald, 2000. "International Parity Relationships between Germany and the United States: A Joint Modelling Approach," Discussion Papers 00-10, University of Copenhagen. Department of Economics.
  8. Ronald MacDonald, 1995. "Long-Run Exchange Rate Modeling," IMF Working Papers 95/14, International Monetary Fund.
  9. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  10. Kugler, Peter & Lenz, Carlos, 1993. "Multivariate Cointegration Analysis and the Long-Run Validity of PPP," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 180-84, February.
  11. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February.
  12. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  13. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  14. Lutkepohl, Helmut & Reimers, Hans-Eggert, 1992. "Impulse response analysis of cointegrated systems," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 53-78, January.
  15. Jeffrey A. Frankel & Andrew K. Rose, 1994. "A Survey of Empirical Research on Nominal Exchange Rates," NBER Working Papers 4865, National Bureau of Economic Research, Inc.
  16. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  17. Ronald MacDonald & Luca Ricci, 2001. "PPP and the Balassa Samuelson Effect: the Role of the Distribution Sector," CESifo Working Paper Series 442, CESifo Group Munich.
  18. Ronald MacDonald & Ian W. Marsh, 1997. "On Fundamentals And Exchange Rates: A Casselian Perspective," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 655-664, November.
  19. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  20. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  21. Paul Hallwood & Ronald MacDonald, 2008. "International Money and Finance," Working papers 2008-02, University of Connecticut, Department of Economics.
  22. Paruolo, Paolo, 1996. "On the determination of integration indices in I(2) systems," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 313-356.
  23. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  24. Alexander W. Hoffmaister & Carlos I. Medeiros & Pierre-Richard Agénor, 1997. "Cyclical Fluctuations in Brazil's Real Exchange Rate," IMF Working Papers 97/128, International Monetary Fund.
  25. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  26. Patel, Jayendu, 1990. "Purchasing Power Parity as a Long-Run Relation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 367-79, Oct.-Dec..
  27. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
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Citations

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Cited by:
  1. David Guerreiro, 2013. "Is the European debt crisis a mere balance of payments crisis?," FIW Working Paper series 118, FIW.
  2. Hilde Christiane Bjørnland & Håvard Hungnes, 2002. "Fundamental determinants of the long run real exchange rate: The case of Norway," Discussion Papers 326, Research Department of Statistics Norway.
  3. Cushman, David O., 2008. "Long-run PPP in a system context: No favorable evidence after all for the U.S., Germany, and Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 413-424, December.
  4. Martin Melecky, 2008. "A Structural Investigation of Third-Currency Shocks to Bilateral Exchange Rates," International Finance, Wiley Blackwell, vol. 11(1), pages 19-48, 05.
  5. Ciner, Cetin, 2011. "Information transmission across currency futures markets: Evidence from frequency domain tests," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 134-139, June.
  6. Melecky, M, 2007. "Currency Preferences in a Tri-Polar Model of Foreign Exchange," MPRA Paper 4186, University Library of Munich, Germany.
  7. Lindblad, Hans & Sellin, Peter, 2006. "A Simultaneous Model of the Swedish Krona, the US Dollar and the Euro," Working Paper Series 193, Sveriges Riksbank (Central Bank of Sweden).

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