TY - JOUR
T1 - Dissecting Exchange Rates and Fundamentals in the Modern Floating Era
T2 - The Role of Permanent and Transitory Shocks
AU - Chou, Yu Hsi
N1 - Publisher Copyright:
© 2016 John Wiley & Sons Ltd
PY - 2017/2/1
Y1 - 2017/2/1
N2 - In this paper, we apply a permanent–transitory decomposition method to analyze the link between nominal exchange rates and fundamentals in the modern floating era. The results suggest that transitory shocks dominate nominal exchange rate fluctuations, while permanent shocks dominate the variations in fundamentals. Therefore, the findings suggest that the nominal exchange rate should not be approximated by a pure random walk. Moreover, we find that unobserved fundamentals in the Taylor rule model can explain the transitory components in exchange rates.
AB - In this paper, we apply a permanent–transitory decomposition method to analyze the link between nominal exchange rates and fundamentals in the modern floating era. The results suggest that transitory shocks dominate nominal exchange rate fluctuations, while permanent shocks dominate the variations in fundamentals. Therefore, the findings suggest that the nominal exchange rate should not be approximated by a pure random walk. Moreover, we find that unobserved fundamentals in the Taylor rule model can explain the transitory components in exchange rates.
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U2 - 10.1111/roie.12261
DO - 10.1111/roie.12261
M3 - Article
AN - SCOPUS:84990032831
SN - 0965-7576
VL - 25
SP - 165
EP - 194
JO - Review of International Economics
JF - Review of International Economics
IS - 1
ER -