On causal Relationships Between Exchange Rates and Fundamentals: Better Than You Think

Dimitris Christopoulos and Miguel Leon-Ledesma

Studies in Economics from School of Economics, University of Kent

Abstract: This note revisits the temporal causality between exchange rates and fundamentals put forward by Engel and West (2005). We analyze the causal link within multivariate VARs by making use of the concept of multi-step causality. Our results show that, considering information content beyond one-period ahead, the causal link between exchange rates and fundamentals is stronger than previously reported. We find Granger-causality running from exchange rates to fundamentals at some horizon in 49% of our tests and running from fundamentals to exchange rates in 59% of them.

Keywords: Granger-causality; multi-step; exchange rates; fundamentals (search for similar items in EconPapers)
JEL-codes: C32 F31 F37 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
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Citations: View citations in EconPapers (2)

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