Explaining and forecasting the euro/dollar exchange rate through a non-linear threshold model

Asmara Jamaleh

The European Journal of Finance, 2002, vol. 8, issue 4, 422-448

Abstract: A linear econometric error correction model (ECM) model is built, based on short interest rates, gross domestic product (GDP) growth expectations and inflation differentials, in order to explain the euro/dollar exchange rate dynamics and provide reliable forecasts. This specification performs well. However, the introduction of non-linear threshold dynamics provides a better understanding of 'abnormal' features other than deviations from long-run equilibrium levels, allowing for the possibility of asymmetric behaviour. Empirical evidence of this is found in the actual dynamics of the euro. The non-linear specification performs better than the linear model in both in-sample fitting and out-of-sample forecasting, showing that fundamentals hold, working also through some non-linear mechanism, in explaining the euro/dollar dynamics.

Keywords: Euro Dollar Exchange Rate; Economic Fundamentals; Long-RUN; Equilibrium; Outliers; Non-LINEARITY; Threshold Models (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (5)

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DOI: 10.1080/13518470210167301

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