Exchange Rates and Fundamentals

Charles Engel () and Kenneth D. West ()

No 10723, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show analytically that in a rational expectations present value model, an asset price manifests near random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the well known puzzle that fundamental variables such as relative money supplies, outputs, inflation and interest rates provide little help in predicting changes in floating exchange rates. As well, we show that the data do exhibit a related link suggested by standard models - that the exchange rate helps predict these fundamentals. The implication is that exchange rates and fundamentals are linked in a way that is broadly consistent with asset pricing models of the exchange rate.

JEL-codes: F31 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2004-08
Note: EFG IFM ME AP
View list of references View citations in EconPapers

Downloads: (external link)
http://www.nber.org/papers/w10723.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

Related works:
Working Paper: Exchange rates and fundamentals (2003)
Journal Article: Exchange rates and fundamentals (2003)
Journal Article: Exchange Rates and Fundamentals (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:nbr:nberwo:10723

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w10723
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc
Address: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Contact information at EDIRC.
Series data maintained by ().