TY - JOUR
T1 - Understanding the sources of the exchange rate disconnect puzzle
T2 - A variance decomposition approach
AU - Chou, Yu Hsi
N1 - Publisher Copyright:
© 2017 Elsevier Inc.
PY - 2018/7
Y1 - 2018/7
N2 - In this paper, we apply the monetary model to examine the degree to which economic fundamentals can explain large and persistent fluctuations in the spread between the nominal exchange rate and monetary fundamentals i.e. the so-called “exchange rate disconnect puzzle.” We show that deviations from purchasing power parity account for the bulk of the variation in the deviations of the nominal exchange rate from observed monetary fundamentals, whereas the importance of the risk premium becomes more pronounced after the establishment of the European Economic and Monetary Union.
AB - In this paper, we apply the monetary model to examine the degree to which economic fundamentals can explain large and persistent fluctuations in the spread between the nominal exchange rate and monetary fundamentals i.e. the so-called “exchange rate disconnect puzzle.” We show that deviations from purchasing power parity account for the bulk of the variation in the deviations of the nominal exchange rate from observed monetary fundamentals, whereas the importance of the risk premium becomes more pronounced after the establishment of the European Economic and Monetary Union.
KW - Exchange rate disconnect puzzle
KW - Monetary fundamentals
KW - Variance decomposition
UR - http://www.scopus.com/inward/record.url?scp=85033800614&partnerID=8YFLogxK
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U2 - 10.1016/j.iref.2017.10.029
DO - 10.1016/j.iref.2017.10.029
M3 - Article
AN - SCOPUS:85033800614
SN - 1059-0560
VL - 56
SP - 267
EP - 287
JO - International Review of Economics and Finance
JF - International Review of Economics and Finance
ER -