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The Non-Linear Dynamic Relationship between Exchange Rates and Macroeconomic Fundamentals in G-7 Countries

Author

Listed:
  • Chien-Chiang Lee

    (Department of Finance, National Sun Yat-sen University, Taiwan)

  • Tsangyao Chang

    (Department of Finance, Feng Chia University, Taiwan)

  • Chi-Chuan Lee

    (Department of Money and Banking, National Chengchi University, Taiwan)

  • Hsin-Yi Lin

    (Department of Applied Economics, National Chung Hsing University, Taiwan)

Abstract

This paper explores the long-run and causality relationship between the exchange rate and macroeconomic fundamentals in G-7 countries, employing recently developed tests for the linear cointegration provided by Johansen (1988), the non-parametric cointegration method provided by Bierens (1997), as well as the non-linear Granger causality provided by Hiemstra and Jones (1994) and Diks and Panchenko (2006). The results for the Johansen (1988) test show that there is no evidence of a long-run cointegraion relationship between the two variables. Conversely, Bierens (1997) provides clear support of a non-linear cointegration relationship. We also find that uni-directional causality exists, except for Canada, Germany, and the United Kingdom according to the Hiemstra and Jones (1994) test. However, the Diks and Panchenko (2006) test finds bi-directional causality in Canada, Germany, and United Kingdom, uni-directional causality running from the exchange rate to fundamentals in Italy, and uni-directional causality running from fundamentals to the exchange rate in Japan.

Suggested Citation

  • Chien-Chiang Lee & Tsangyao Chang & Chi-Chuan Lee & Hsin-Yi Lin, 2010. "The Non-Linear Dynamic Relationship between Exchange Rates and Macroeconomic Fundamentals in G-7 Countries," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 6(2), pages 203-228, July.
    • Handle: RePEc:jec:journl:v:6:y:2010:i:2:p:203-228
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    More about this item

    Keywords

    exchange rate; macroeconomic fundamentals; non-linear; Granger causality; G-7 countries;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • 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

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