Exchange rates and fundamentals: Further evidence based on asymmetric causality test

Siew-Voon Soon and Ahmad Zubaidi Baharumshah

International Economics, 2021, issue 165, 67-84

Abstract: This article uses an approach developed by Hatemi-J (2012) which is based on country-specific bootstrap critical values to disclose the nexus between the US dollar-based real exchange rates and observed macroeconomic fundamentals—relative price and interest rate differential. The Granger non-causality test reveals that fundamentals drive the US dollar exchange rates before the Asian financial crisis (AFC) in some cases. The exchange rate–fundamentals nexus is unstable and has reversed in the aftermath of the crisis. Exchange rates help to predict fundamentals in the post-AFC period, as suggested by the present value model. The result holds even after the Federal Reserve announces the termination of quantitative easing programs. Asian currency movements are expected to trigger adjustments in fundamentals in an asymmetric fashion. It tells us that the success of fundamental-based models in predicting the future path of Asian currencies against the US dollar may not be robust after all.

Keywords: Bilateral exchange rate; Interest rate differential; Asian countries; Asymmetry Granger causality (search for similar items in EconPapers)
JEL-codes: C51 F31 F41 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.sciencedirect.com/science/article/pii/S2110701720302857 (text/html)

Related works:
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:cii:cepiie:2021-q1-165-6

Access Statistics for this article

More articles in International Economics from CEPII research center Contact information at EDIRC.
Bibliographic data for series maintained by ().