The influence of Taylor rule deviations on the real exchange rate

Wolfram Wilde

International Review of Economics & Finance, 2012, vol. 24, issue C, 51-61

Abstract: This paper explores the influence of Taylor rule deviations on the Deutschmark-Dollar and Yen-Dollar real exchange rate. Taylor rule deviations occur if the short term interest rate persistently deviates from an interest rate path consistent with the Taylor rule. It uses the behavior rational expectation exchange rate model, where the monetary policy is captured by a Taylor rule. The set of exchange rate fundamentals is constructed in two different ways. In the baseline specification only the traditional macro fundamentals are considered, whereas in the second specification Taylor rule deviations are included as well. This paper finds that Taylor rule deviations are important determinants of the exchange rate as the second specification fits the data much better than the baseline.

Keywords: Exchange rate disconnect puzzle; Exchange rate fluctuations; Taylor rule (search for similar items in EconPapers)
JEL-codes: E5 F31 F41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:24:y:2012:i:c:p:51-61

DOI: 10.1016/j.iref.2012.01.001

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