Revisiting the exchange rate disconnect puzzle

George B. Tawadros

Applied Economics, 2017, vol. 49, issue 36, 3645-3668

Abstract: One of the major anomalies in International Macroeconomics is the persistent finding that the exchange rate has no empirical relationship with a variety of macroeconomic fundamentals. Dubbed the ‘exchange rate disconnect puzzle’, this article examines this issue for five Australian dollar bilateral exchange rates, using quarterly data for the period 1984:1–2015:4. A novel feature of this article is that it departs from the extant literature by using a different approach to testing for cointegration. The results show that the exchange rates and fundamentals move together in the long run. Furthermore, the results show that fundamentals Granger cause exchange rates, both in the short run and the long run.

Date: 2017
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DOI: 10.1080/00036846.2016.1265077

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