Sterling's Relationship with the Dollar and the Deutschemark: 1976-89

Andrew Haldane and Stephen Hall

Economic Journal, 1991, vol. 101, issue 406, 436-43

Abstract: This paper evaluates the linkages between bilateral exchange rates using a time-varying parameter model, which can be estimated using the Kalman filter. The technique solves many of the statistical problems which arise when ordinary least squares is used to estimate currency correlation. Applying the technique to the dollar-sterling, DM-sterling, and DM-dollar bilateral exchange rates, the results suggest a market weakening (strengthening) of sterling's relationship with the dollar (DM) since the mid-1970s. Additionally, these currency linkages are shown to have undergone a number of regime shifts, suggesting that the timing of the weakening of the dollar/sterling relationship is different to that proposed by previous studies. Copyright 1991 by Royal Economic Society.

Date: 1991
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