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Application Of Fundamental Models To Money And Exchange Rate Markets

Author

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  • Andres Vesilind

    (University of Tartu Faculty of Economics and Business Administration)

Abstract

The present paper addresses the issue of fundamental determinants of US and Euro area government bonds interest rate levels, yield curve spreads and G3 foreign exchange rates. The author aims to find whether there exist any fundamental indicators that would allow one to register some “equilibrium level” on the markets. As a baseline for modelling interest rate and yield curve spreads, the conventional IS-LM framework, and for modelling exchange rates, the standard monetary model of exchange rates were chosen. The estimated models cover 10-year government bonds interest rate levels and 2-year-10-year yield curve spreads in the US and Germany, and the USD/EUR and USD/JPY exchange rates. The results indicate that the fundamental indicators can give relatively accurate estimates of the equilibrium value ex post, but ex ante model estimates may lag behind the actual market cycle turning points.

Suggested Citation

  • Andres Vesilind, 2003. "Application Of Fundamental Models To Money And Exchange Rate Markets," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 22, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    • Handle: RePEc:mtk:febawb:22
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    References listed on IDEAS

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    1. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729, Elsevier.
    2. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    3. Guglielmo Maria Caporale & Geoffrey Williams, 2001. "Bond Markets and Macroeconomic Performance," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 4(1), pages 27-44, May.
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