TY - JOUR
T1 - Revisiting the relationship between exchange rates and fundamentals
AU - Chen, Shiu Sheng
AU - Chou, Yu Hsi
N1 - Funding Information:
We would like to thank William Lastrapes (Editor), an anonymous referee, Tsung-Wu Ho, David Ding, Benjamin Wong, and the seminar participants at ICBASS 2014, ICEFB 2014, 2014 Taiwan Econometric Society Annual Meeting and WEAI 11th International Conference for helpful comments and suggestions. This research was supported by a grant from the National Science Council ( NSC-101-2410-H-030-011 ).
Publisher Copyright:
© 2015 Elsevier Inc.
PY - 2015
Y1 - 2015
N2 - In this paper, we apply the permanent-transitory decomposition method to analyze the role of permanent and transitory shocks in explaining the apparent weak link between nominal exchange rates and economic fundamentals. The results suggest that for most of the countries we investigate, including Finland, Italy, Portugal, France and Switzerland, transitory shocks dominate exchange rate fluctuations, while permanent shocks dominate the variations in economic fundamentals. The findings therefore provide an alternative interpretation of the "exchange rate disconnect puzzle". Moreover, the results also suggest that comprehensive modeling of transitory components in empirical models should not be neglected in studies of the dynamics of exchange rates.
AB - In this paper, we apply the permanent-transitory decomposition method to analyze the role of permanent and transitory shocks in explaining the apparent weak link between nominal exchange rates and economic fundamentals. The results suggest that for most of the countries we investigate, including Finland, Italy, Portugal, France and Switzerland, transitory shocks dominate exchange rate fluctuations, while permanent shocks dominate the variations in economic fundamentals. The findings therefore provide an alternative interpretation of the "exchange rate disconnect puzzle". Moreover, the results also suggest that comprehensive modeling of transitory components in empirical models should not be neglected in studies of the dynamics of exchange rates.
KW - Exchange rates
KW - Monetary fundamentals
KW - Permanent-transitory decomposition
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U2 - 10.1016/j.jmacro.2015.07.004
DO - 10.1016/j.jmacro.2015.07.004
M3 - Article
AN - SCOPUS:84954450569
SN - 0164-0704
VL - 46
SP - 1
EP - 22
JO - Journal of Macroeconomics
JF - Journal of Macroeconomics
ER -