EconPapers    
Economics at your fingertips  
 

Trend Fundamentals and Exchange Rate Dynamics

Florian Huber and Daniel Kaufmann ()

Economica, 2020, vol. 87, issue 348, 1016-1036

Abstract: We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US dollar. The empirical model is based on the assumption that two countries’ monetary policy strategies may be well described by Taylor rules with a time‐varying inflation target, a time‐varying natural rate of unemployment, and interest rate smoothing. Compared to the existing literature, our model simultaneously provides estimates of the latent components included in a typical Taylor rule specification and the model‐based real exchange rate. Our estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered, outperforming a benchmark model that does not account for changes in trend inflation and trend unemployment. More precisely, the proposed approach improves on competing models in tracking the actual evolution of the real exchange rate in terms of simple correlations while it appreciably improves on simpler competitors in terms of matching the persistence of the real exchange rate.

Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://doi.org/10.1111/ecca.12334

Related works:
Working Paper: Trend Fundamentals and Exchange Rate Dynamics (2019) Downloads
Working Paper: Trend Fundamentals and Exchange Rate Dynamics (2016) Downloads
Working Paper: Trend Fundamentals and Exchange Rate Dynamics (2016) Downloads
Working Paper: Trend Fundamentals and Exchange Rate Dynamics (2015) Downloads
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: https://EconPapers.repec.org/RePEc:bla:econom:v:87:y:2020:i:348:p:1016-1036

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0013-0427

Access Statistics for this article

Economica is currently edited by Frank Cowell, Tore Ellingsen and Alan Manning

More articles in Economica from London School of Economics and Political Science Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2021-10-02
Handle: RePEc:bla:econom:v:87:y:2020:i:348:p:1016-1036