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Third-country effects on the exchange rate

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  • Berg, Kimberly A.
  • Mark, Nelson C.

Abstract

Predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries. These regressions characteristically have low explanatory power, which leaves room for an omitted variables interpretation. We test whether these omitted variables are from third-countries. When third-country macro factors are added to bilateral exchange rate regressions, they enter significantly and increase the adjusted R2. A three-country exchange rate model illustrates potential channels for third-country spillovers to affect the bilateral rate.

Suggested Citation

  • Berg, Kimberly A. & Mark, Nelson C., 2015. "Third-country effects on the exchange rate," Journal of International Economics, Elsevier, vol. 96(2), pages 227-243.
  • Handle: RePEc:eee:inecon:v:96:y:2015:i:2:p:227-243
    DOI: 10.1016/j.jinteco.2015.03.003
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    5. Ryan Greenaway‐McGrevy & Nelson C. Mark & Donggyu Sul & Jyh‐Lin Wu, 2018. "Identifying Exchange Rate Common Factors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 2193-2218, November.
    6. Joscha Beckmann & Robert Czudaj, 2017. "Effective Exchange Rates, Current Accounts and Global Imbalances," Review of International Economics, Wiley Blackwell, vol. 25(3), pages 500-533, August.
    7. Joscha Beckmann & Gary Koop & Dimitris Korobilis & Rainer Alexander Schüssler, 2020. "Exchange rate predictability and dynamic Bayesian learning," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(4), pages 410-421, June.
    8. Beckmann, Joscha, 2021. "Measurement and effects of euro/dollar exchange rate uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 773-790.
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    10. Ponomareva, Natalia & Sheen, Jeffrey & Wang, Ben, 2015. "The Common Factor of Bilateral U.S. Exchange Rates: What is it Related to?," MPRA Paper 68966, University Library of Munich, Germany.
    11. Chen, Zhiyuan & Zhang, Jie & Zheng, Wenping, 2017. "Import and innovation: Evidence from Chinese firms," European Economic Review, Elsevier, vol. 94(C), pages 205-220.
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    Keywords

    Exchange rates; Disconnect puzzle; Multi-country model;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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