Do market fundamentals determine the Dollar–Euro exchange rate?

Nicholas Apergis (), George K. Zestos and Dmitriy S. Shaltayev

Journal of Policy Modeling, 2012, vol. 34, issue 1, 1-15

Abstract: The study searches for an optimal Dollar–Euro exchange rate policy for the US and the Euro Area (EA) countries. To achieve this, it explores the causal links between the US Dollar–Euro exchange rate and three key macroeconomic variables. The empirical investigation is carried out in an Error Correction Vector Autoregressive (ECVAR) framework based on the theory of cointegration and error-correction representation of cointegrated variables. The results provide evidence in favor of the presence of a long-run relationship between the exchange rate and the spread between US and EA (Eurozone) interest rates. With respect to the direction of causality, the empirical findings show that in the long and short-run there is a uni-directional causal relationship between interest-rate spreads and the US Dollar–Euro exchange rate. This result constitutes a strong message for policy advising to fiscal and monetary authorities on both sides of the Atlantic, and beyond.

Keywords: US Dollar–Euro exchange rate; Macroeconomic factors; Error Correction Vector Autoregressive model; Causality tests (search for similar items in EconPapers)
JEL-codes: C32 F31 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:34:y:2012:i:1:p:1-15

DOI: 10.1016/j.jpolmod.2011.10.003

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