Markov Switching Regimes in a Monetary Exchange Rate Model

Michael Frömmel (), Ronald MacDonald () and Lukas Menkhoff ()

Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover from Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: This paper extends the real interest differential (RID) model of Frankel (1979) by introducing Markov regime switches for three exchange rates over the years 1973 - 2000. Evidence of a non-linear relationship between exchange rates and underlying fundamentals is provided. One of the regimes represents exactly the RID case. Decisive fundamentals in determining regimes turn out to be mainly interest rates. The established relationship is shown to be stable in several respects: regimes are highly persistent, provide a much better description of the data than alternatives and are robust towards several modifications.

Keywords: Markov Switching Model; monetary model; exchange rates; real interest differential model (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-fin, nep-ifn and nep-rmg
Date: 2002-11
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Related works:
Working Paper: Markov Switching Regimes In A Monetary Exchange Rate Model (2004)
Journal Article: Markov switching regimes in a monetary exchange rate model (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:han:dpaper:dp-266

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