Identification of Euro-Dollar Rate Dynamics Regimes: The Approach Based on Reconstructing Nonlinear Dynamic Systems

M. Kamrotov

Voprosy Ekonomiki, 2010, issue 12

Abstract: This paper proposes an empirical approach to euro-dollar rate modeling based on continuous-time dynamic systems. It is shown that the dynamics of the exchange rate and key policy rates of Federal Reserve System and European Central Bank (which are supposed to be the main drivers of the euro-dollar rate) has displayed several regimes in the past, and these regimes can be successfully modeled in terms of linear differential equations. The Grobman-Hartman theorem is used to reconstruct the fundamental nonlinear law of motion of the exchange rate. Linear systems are considered as approximations of a nonlinear system in the neighborhood of its steady states. This approach allows reveal all possible regimes of exchange rate dynamics.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:nos:voprec:y:2010:id:1109

DOI: 10.32609/0042-8736-2010-12-82-98

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