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 non-linear 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 InfoPaper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Discussion Papers with number 6_2006.
Date of creation: 15 Mar 2006
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Non-linearity; Markov-switching Model; Fundamentals;
Other versions of this item:
- Carlo Altavilla, 2008. "The (UN-) stable relationship between the exchange rate and its fundamentals," Applied Economics Letters, Taylor & Francis Journals, vol. 15(7), pages 539-544.
- 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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