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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"Why is it so difficult to beat the random walk forecast of exchange rates?,"
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- Mark P. Taylor, 2005. "Official Foreign Exchange Intervention As A Coordinating Signal In The Dollar-Yen Market," Pacific Economic Review, Wiley Blackwell, vol. 10(1), pages 73-82, 02.
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