Seasonal fluctuations and equilibrium models of exchange rate

Juan Jimenez-Martin and Rafael Flores de Frutos

Applied Economics, 2009, vol. 41, issue 20, 2635-2652

Abstract: Most of the evidence on dynamic equilibrium exchange rate models is based on seasonally adjusted consumption data. Equilibrium models have not worked well in explaining the actual exchange rate. However, the use of seasonally adjusted data might be responsible for the spurious rejection of the model. This article presents a new equilibrium model for the exchange rates that incorporates seasonal preferences. The fit of the model to the data is evaluated for five industrialized countries using seasonally unadjusted data. Our findings indicate that a model with seasonal preferences can generate monthly time series of the exchange rate without seasonality even when the variables that theoretically determine the exchange rate show clear seasonal behaviours. Further, the model can generate theoretical exchange rates with the same order of integration than actual exchange rates, and in some cases, with the same stochastic trend.

Date: 2009
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DOI: 10.1080/00036840701222603

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