The (Un-) Stable Relationship between The Exchange rate and its Fundamentals
This study investigates the relationship between the euro-dollar exchange rate and its underlying fundamentals by adopting non-linear time series modelling. We found that this relationship is episodically unstable. We also found that an equilibrium-distorting shock is likely to have a greater effect on the exchange rate during periods when the deviation between exchange rate and fundamentals is large; as a consequence, when the exchange rate is close to its equilibrium value it tends to be less sensitive to any shocks in the fundamentals.
|Date of creation:||15 Mar 2006|
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- Kilian, Lutz & Taylor, Mark P., 2001.
"Why is it so difficult to beat the random walk forecast of exchange rates?,"
Working Paper Series
0088, European Central Bank.
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"The search for equilibrium relationships in international finance: the case of the monetary model,"
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- Michael, Panos & Nobay, A Robert & Peel, David A, 1997.
"Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation,"
Journal of Political Economy,
University of Chicago Press, vol. 105(4), pages 862-79, August.
- Tom Doan, . "RATS programs to replicate Michael-Nobay-Peel ESTAR models," Statistical Software Components RTZ00113, Boston College Department of Economics.
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