A dynamic econometric analysis of the dollar-pound exchange rate in an era of structural breaks and policy regime shifts

Jennifer Castle and Takamitsu Kurita

Journal of Economic Dynamics and Control, 2021, vol. 128, issue C

Abstract: We employ a newly-developed partial cointegration system allowing for level shifts to examine whether economic fundamentals form the long-run determinants of the dollar-pound exchange rate over a recent period characterised by structural breaks and policy regime shifts. The paper models both long-run and short-run dynamic features of the exchange rate using a set of economic variables that explicitly reflect quantitative monetary policy and the influence of a forward exchange market. Out-of-sample forecasts comparing the model with economic fundamentals to benchmarks including the random walk indicate that fundamentals can help at short horizons but less so at longer horizons.

Keywords: Exchange rates; Unconventional monetary policies; Structural breaks; Economic fundamentals; General-to-specific approach; Partial cointegrated vector autoregressive models (search for similar items in EconPapers)
JEL-codes: C22 C32 C52 F31 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:128:y:2021:i:c:s0165188921000749

DOI: 10.1016/j.jedc.2021.104139

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