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Exchange rates and fundamentals: Further evidence based on asymmetric causality test

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  • Siew-Voon Soon
  • Ahmad Zubaidi Baharumshah

Abstract

This article uses an approach developed by Hatemi-J (2012) which is based on country-specific bootstrap critical values to disclose the nexus between the US dollar-based real exchange rates and observed macroeconomic fundamentals—relative price and interest rate differential. The Granger non-causality test reveals that fundamentals drive the US dollar exchange rates before the Asian financial crisis (AFC) in some cases. The exchange rate–fundamentals nexus is unstable and has reversed in the aftermath of the crisis. Exchange rates help to predict fundamentals in the post-AFC period, as suggested by the present value model. The result holds even after the Federal Reserve announces the termination of quantitative easing programs. Asian currency movements are expected to trigger adjustments in fundamentals in an asymmetric fashion. It tells us that the success of fundamental-based models in predicting the future path of Asian currencies against the US dollar may not be robust after all.

Suggested Citation

  • Siew-Voon Soon & Ahmad Zubaidi Baharumshah, 2021. "Exchange rates and fundamentals: Further evidence based on asymmetric causality test," International Economics, CEPII research center, issue 165, pages 67-84.
    • Handle: RePEc:cii:cepiie:2021-q1-165-6
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    File URL: https://www.sciencedirect.com/science/article/pii/S2110701720302857
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    Cited by:

    1. Azzam, Islam & El-Masry, Ahmed A. & Yamani, Ehab, 2023. "Foreign exchange market efficiency during COVID-19 pandemic," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 717-730.

    More about this item

    Keywords

    Bilateral exchange rate; Interest rate differential; Asian countries; Asymmetry Granger causality;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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