Nonlinearities in exchange rate determination in a small open economy: Some evidence for Canada

Bernd Kempa and Jana Riedel

The North American Journal of Economics and Finance, 2013, vol. 24, issue C, 268-278

Abstract: We analyze bilateral Canadian-US dollar exchange rate movements within a Markov switching framework with two states, one in which the exchange rate is determined by the monetary model, and the other in which its behavior follows the predictions of a Taylor rule exchange rate model. There are a number of regime switches throughout the estimation period 1991:2–2008:12 which we can each relate to particular changes in Canadian monetary policy. These results imply that an active monetary policy stance may account for nonlinearities in the exchange rate-fundamentals nexus. The strong evidence of nonlinearities also confirms the notion that exchange rate movements cannot be explained exclusively in terms of any one particular exchange rate model.

Keywords: Exchange rate models; Taylor rule; Bayesian econometrics; Markov switching (search for similar items in EconPapers)
JEL-codes: C11 C24 E42 F31 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:24:y:2013:i:c:p:268-278

DOI: 10.1016/j.najef.2012.11.001

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