The Non-Linear Dynamic Relationship between Exchange Rates and Macroeconomic Fundamentals in G-7 Countries

Chien-Chiang Lee (), Tsangyao Chang, Chi-Chuan Lee and Hsin-Yi Lin
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Chi-Chuan Lee: Department of Money and Banking, National Chengchi University, Taiwan
Hsin-Yi Lin: Department of Applied Economics, National Chung Hsing University, Taiwan

Journal of Economics and Management, 2010, vol. 6, issue 2, 203-228

Abstract: This paper explores the long-run and causality relationship between the exchange rate and macroeconomic fundamentals in G-7 countries, employing recently developed tests for the linear cointegration provided by Johansen (1988), the non-parametric cointegration method provided by Bierens (1997), as well as the non-linear Granger causality provided by Hiemstra and Jones (1994) and Diks and Panchenko (2006). The results for the Johansen (1988) test show that there is no evidence of a long-run cointegraion relationship between the two variables. Conversely, Bierens (1997) provides clear support of a non-linear cointegration relationship. We also find that uni-directional causality exists, except for Canada, Germany, and the United Kingdom according to the Hiemstra and Jones (1994) test. However, the Diks and Panchenko (2006) test finds bi-directional causality in Canada, Germany, and United Kingdom, uni-directional causality running from the exchange rate to fundamentals in Italy, and uni-directional causality running from fundamentals to the exchange rate in Japan.

Keywords: exchange rate; macroeconomic fundamentals; non-linear; Granger causality; G-7 countries (search for similar items in EconPapers)
JEL-codes: C32 F31 F41 (search for similar items in EconPapers)
Date: 2010
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