Title: Exchange rates and fundamentals: A non-linear relationship?
Authors: De Grauwe, Paul ×
Vansteenkiste, Isabel #
Issue Date: Jan-2007
Publisher: John wiley & sons ltd
Series Title: International journal of finance & economics vol:12 issue:1 pages:37-54
Abstract: 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 (c) 2007 John Wiley & Sons, Ltd.
ISSN: 1076-9307
Publication status: published
KU Leuven publication type: IT
Appears in Collections:Research Center of International Economics, Leuven
× corresponding author
# (joint) last author

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