On exchange rate comovements: New evidence from a Taylor rule fundamentals model with adaptive learning

Gilles de Truchis, Benjamin Keddad () and Cyril Dell'Eva
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Cyril Dell'Eva: PSB - Paris School of Business - HESAM - HESAM Université - Communauté d'universités et d'établissements Hautes écoles Sorbonne Arts et métiers université

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Abstract: This paper proposes a flexible theoretical framework to assess the conditions under which long-run comovements are likely to appear between exchange rates. We introduce a three-country extension of the Taylor rule fundamentals model with adaptive learning. Moreover, economies are affected by common and/or country-specific shocks and react according to the preferences of central banks. The simulation results suggest that the extent to which exchange rates comove in the long run strongly depends on the extent of linkages between economies and the purchasing power parity of exchange rates. Indeed without similar Taylor rules in two economically linked countries, exchange rates comovements disappear. We pursue our theoretical analysis using real data and find strong evidence of fractional cointegration between several European exchange rates.

Keywords: Taylor; rules; Adaptive; learning; Fractional; cointegration; Exchange; rates (search for similar items in EconPapers)
Date: 2017-05
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Citations: View citations in EconPapers (2)

Published in Journal of International Financial Markets, Institutions and Money, 2017, 48, pp.82-98. ⟨10.1016/j.intfin.2016.12.006⟩

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Journal Article: On exchange rate comovements: New evidence from a Taylor rule fundamentals model with adaptive learning (2017)
Working Paper: On exchange rate comovements: New evidence from a Taylor rule fundamentals model with adaptive learning (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01635867

DOI: 10.1016/j.intfin.2016.12.006

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