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Monetary Fundamentals and Exchange Rate Dynamics under Different Nominal Regimes

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Author Info
Sarno, Lucio
Valente, Giorgio
Wohar, Mark E

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Abstract

We investigate the dynamic relationship between the US dollar exchange rate and its fundamentals across different exchange rate regimes using data going back to the late 1800s or early 1900s for six industrialized countries. For these countries there is evidence of a long-run relation between the nominal exchange rate and monetary fundamentals consistent with conventional theories of exchange rate determination. We employ a Markov-switching vector equilibrium correction model that allows for regime shifts in the entire set of parameters and the variance-covariance matrix. Our results suggest that the relative importance of exchange rates and fundamentals in restoring the long-run equilibrium level implied by the exchange rate-monetary fundamentals model varies significantly over time and is affected by the nominal exchange rate regime in operation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3983.

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Date of creation: Jul 2003
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Handle: RePEc:cpr:ceprdp:3983

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Keywords: foreign exchange; monetary fundamentals; non-linearity; regime switching;

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F31 - International Economics - - International Finance - - - Foreign Exchange

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Full references

Cited by:
(explanations, 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.)

  1. Nikolaos Giannellis & Athanasios Papadopoulos, 2005. "Estimating the Equilibrium Effective Exchange Rate for Potential EMU members," Working Papers 0719, University of Crete, Department of Economics, revised 08 Mar 2007. [Downloadable!]
    Other versions:
  2. Angelos Kanas & Georgios Tsiotas, 2005. "Real interest rates linkages between the USA and the UK in the postwar period," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 251-262. [Downloadable!]
  3. Carlo Altavilla & Paul De Grauwe, 2005. "Non-Linearities in the Relation between the Exchange Rate and its Fundamentals," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Menkhoff, Lukas & Rebitzky, Rafael, 2007. "Investor sentiment in the US-dollar: longer-term, nonlinear orientation on PPP," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-376, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  5. Ronald MacDonald & Lukas Menkhoff & Rafael R. Rebitzky, 2009. "Exchange rate forecasters’ performance: evidence of skill?," Working Papers 2009_13, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
  6. Emmanuel Davradakis, 2005. "Macroeconomic fundamentals and exchange rates: a non-parametric cointegration analysis," Applied Financial Economics, Taylor and Francis Journals, vol. 15(7), pages 439-446, April. [Downloadable!] (restricted)
  7. Angelos Kanas, 2009. "Real exchange rates and developing countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(3), pages 280-299. [Downloadable!]
  8. Sofiane H. Sekioua, 2004. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the dominant root and half-lives of shocks," Money Macro and Finance (MMF) Research Group Conference 2004 91, Money Macro and Finance Research Group. [Downloadable!]
  9. Yu Hsing, 2006. "Analysis of Short-term Exchange Rate Movements in Korea: Application of an Extended Mundell--Fleming Model," Global Economic Review, Taylor and Francis Journals, vol. 35(2), pages 145-151, June. [Downloadable!] (restricted)
  10. HSING, Yu, 2006. "Determinants Of Exchange Rate Fluctuations For Venezuela: Application Of An Extended Mundell-Fleming Model," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(1). [Downloadable!] (restricted)
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