The (Un-) Stable Relationship between The Exchange rate and its Fundamentals

Carlo Altavilla ()

Discussion Papers from D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy

Abstract: This study investigates the relationship between the euro-dollar exchange rate and its underlying fundamentals by adopting non-linear time series modelling. We found that this relationship is episodically unstable. We also found that an equilibrium-distorting shock is likely to have a greater effect on the exchange rate during periods when the deviation between exchange rate and fundamentals is large; as a consequence, when the exchange rate is close to its equilibrium value it tends to be less sensitive to any shocks in the fundamentals.

Keywords: Non-linearity; Markov-switching Model; Fundamentals (search for similar items in EconPapers)
JEL-codes: C32 F31 (search for similar items in EconPapers)
Date: 2006-03-15
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Related works:
Journal Article: The (UN-) stable relationship between the exchange rate and its fundamentals (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:prt:dpaper:6_2006

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