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Granger Causality from Exchange Rates to Fundamentals: What Does the Bootstrap Test Show Us?

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Author Info

  • Hsiu-Hsin Ko

    (National University of Kaohsiung)

  • Masao Ogaki

Abstract

We use a residual-based bootstrap method to re-examine the finding of the Granger causality relationship from exchange rates to fundamentals in Engel and West (Exchange rate and fundamentals, Journal of Political Economy 2005, 113 (3), 485–517), in which the evidence for the relation is taken as evidence for the present-value model for exchange rates. The test results are against the previous findings. The Monte Carlo experiment results suggest that the causality test implemented in the previous study tends to spuriously reject null hypotheses. Thus, the existing evidence for the present value model for exchange rates is not robust.

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_577.pdf
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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 577.

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Length: 24 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:roc:rocher:577

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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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Keywords: Bootstrap; Granger causality; exchange rates; fundamentals;

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