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Monetary Fundamentals and Exchange Rate Dynamics under Different Nominal Regimes

  • Lucio Sarno
  • Giorgio Valente
  • Mark E. Wohar

We investigate the dynamic relationship between the U.S. dollar exchange rate and its fundamentals across different exchange rate regimes using data from the late 1800s or early 1900s for six countries. For these countries there is evidence of a long-run relation between the exchange rate and monetary fundamentals consistent with conventional exchange rate theories. Employing a multivariate regime-switching framework, we find that the relative importance of exchange rates and fundamentals in restoring the long-run equilibrium implied by the exchange rate--monetary fundamentals model varies significantly over time and is affected by the exchange rate regime in operation. (JEL F31) Copyright 2004, Oxford University Press.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 42 (2004)
Issue (Month): 2 (April)
Pages: 179-193

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Handle: RePEc:oup:ecinqu:v:42:y:2004:i:2:p:179-193
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