This article analyses the validity of the Taylor rule exchange rate model from a new perspective. In a first step, a model-based exchange rate is derived for Germany and Japan following the approach by Engel and West (2006). This model-based exchange rate is determined by the fundamentals of the...

This paper provides an alternative approach in explaining current account imbalances within the euro area. The inability of the ECB to react to disparities in inflation and economic growth between EMU members results in persistent real interest rate differentials, which in turn cause divergent...

This paper explores the influence of Taylor rule deviations on the Deutschmark-Dollar and Yen-Dollar real exchange rate. Taylor rule deviations occur if the short term interest rate persistently deviates from an interest rate path consistent with the Taylor rule. It uses the behavior rational...

This paper investigates the sources of exchange rate fluctuations when monetary policy follows a Taylor rule interest rate reaction function. We first present a simple dynamic exchange rate model with Taylor rule fundamentals which is triangular in the long-run impacts of shocks to the output...

Although the literature on purchasing power parity (PPP) is rich in controversy, the relative contribution of prices and nominal exchange rates to real exchange rate movements which restore PPP disequilibria has rarely been put under any close scrutiny. Using monthly data from 1973:01 to 2009:12...