Exchange rates and fundamentals: a non-linear relationship?
We test whether the relationship between changes in the nominal exchange rate and changes in its underlying fundamentals has non-linear features. In order to do so, we extend the Markov-switching model as proposed by McConnell and Perez Quiros (2000) and Dewachter (2001) and test it using a sample of low- and high-inflation countries. The empirical analysis shows that for the high-inflation countries the relationship between news in the fundamentals and the exchange rate changes is stable and significant. This is not the case, however, for the low-inflation countries, where frequent regime switches occur. We develop a non-linear model based on the existence of transactions costs that could explain our empirical findings. We find that this simple non-linear model is capable of replicating the empirical evidence uncovered in this paper. Copyright © 2007 John Wiley & Sons, Ltd.
Year of publication: |
2007
|
---|---|
Authors: | Grauwe, Paul De ; Vansteenkiste, Isabel |
Published in: |
International Journal of Finance & Economics. - John Wiley & Sons, Ltd.. - Vol. 12.2007, 1, p. 37-54
|
Publisher: |
John Wiley & Sons, Ltd. |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Exchange rates and fundamentals : a non-linear relationship?
De Grauwe, Paul, (2007)
-
Exchange rates and fundamentals : a non-linear relationship?
De Grauwe, Paul, (2001)
-
Exchange rates and fundamentals : a non-linear relationship?
De Grauwe, Paul, (2014)
- More ...