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The contribution of economic fundamentals to movements in exchange rates

Author

Listed:
  • Balke, Nathan S.
  • Ma, Jun
  • Wohar, Mark E.

Abstract

Starting from the asset pricing approach of Engel and West, we examine the degree to which fundamentals can explain exchange rate fluctuations. We show that it is not possible to obtain sharp inferences about the relative contribution of fundamentals using only data on observed monetary fundamentals—money minus output differentials across countries—and exchange rates. We use additional data on interest rate and price differentials along with the implications of the monetary model of exchange rates to decompose exchange rate fluctuations. In general, we find that money demand shifts, along with observed monetary fundamentals, are an important contributor to exchange rate fluctuations.

Suggested Citation

  • Balke, Nathan S. & Ma, Jun & Wohar, Mark E., 2013. "The contribution of economic fundamentals to movements in exchange rates," Journal of International Economics, Elsevier, vol. 90(1), pages 1-16.
  • Handle: RePEc:eee:inecon:v:90:y:2013:i:1:p:1-16
    DOI: 10.1016/j.jinteco.2012.10.003
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kano, Takashi & Morita, Hiroshi, 2015. "An equilibrium foundation of the Soros chart," Journal of the Japanese and International Economies, Elsevier, vol. 37(C), pages 21-42.
    2. Byrne, Joseph P. & Korobilis, Dimitris & Ribeiro, Pinho J., 2016. "Exchange rate predictability in a changing world," Journal of International Money and Finance, Elsevier, vol. 62(C), pages 1-24.
    3. repec:eee:jimfin:v:81:y:2018:i:c:p:56-75 is not listed on IDEAS
    4. repec:kap:openec:v:29:y:2018:i:1:d:10.1007_s11079-017-9469-5 is not listed on IDEAS
    5. Bertram, Philip & Ma, Jun & Sibbertsen, Philipp, 2015. "Real exchange rates and economic fundamentals: An investigation based on a Markov-STAR model," Hannover Economic Papers (HEP) dp-565, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    6. repec:kap:iaecre:v:23:y:2017:i:2:d:10.1007_s11294-017-9635-y is not listed on IDEAS
    7. Takashi Kano, 2013. "Exchange Rates and Fundamentals: Closing a Two-country Model," CAMA Working Papers 2013-62, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Lansing, Kevin J. & Ma, Jun, 2017. "Explaining exchange rate anomalies in a model with Taylor-rule fundamentals and consistent expectations," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 62-87.
    9. Abbate, Angela & Marcellino, Massimiliano, 2016. "Point, interval and density forecasts of exchange rates with time-varying parameter models," Discussion Papers 19/2016, Deutsche Bundesbank.
    10. repec:pal:imfecr:v:65:y:2017:i:3:d:10.1057_s41308-017-0037-1 is not listed on IDEAS
    11. repec:mbr:jmonec:v:8:y:2013:i:3:p:89-115 is not listed on IDEAS
    12. Chen, Shiu-Sheng & Chou, Yu-Hsi, 2015. "Revisiting the relationship between exchange rates and fundamentals," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 1-22.
    13. repec:bok:journl:v:23:y:2017:i:3:p:1-22 is not listed on IDEAS
    14. KANO, Takashi, 2016. "Exchange Rates and Fundamentals: A General Equilibrium Exploration," Discussion paper series HIAS-E-19, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    15. repec:eee:ecmode:v:68:y:2018:i:c:p:644-660 is not listed on IDEAS

    More about this item

    Keywords

    Bayesian analysis; Exchange rate decomposition; Monetary model; State-space model;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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