Third country news in the monetary model of the exchange rate

John Jackson, Henry Thompson and Juliet Zheng

Applied Financial Economics, 2005, vol. 15, issue 11, 757-764

Abstract: With third country bonds added to the monetary model of exchange rate news, third country news would have a theoretical effect on exchange rate news. The present paper uncovers empirical evidence of third country (USA) news for a number of exchange rates. Further, insignificant income, interest rate, and inflation variables in the two country model become significant with third country news, suggesting model misspecification. The unexplained variance of exchange rates may not be due to speculative bubbles as supposed, and foreign exchange markets may not be as efficient as they have appeared.

Date: 2005
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DOI: 10.1080/09603100500108139

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