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Modelling and forecasting the dollar-pound exchange rate in the presence of structural breaks

Jennifer Castle () and Takamitsu Kurita

No 866, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: We employ a newly-developed partial cointegration system allowing for level shifts to examine whether economic fundamentals form the long-run determinants of the dollar-pound exchange rate in an era of structural change. The paper uncovers a class of local data generation mechanisms underlying long-run and short-run dynamic features of the exchange rate using a set of economic variables that explicitly reflect the central banks’ monetary policy stances and the influence of a forward exchange market. The impact of the Brexit referendum is evaluated by examining forecasts when the dollar-pound exchange rate fell substantially around the vote.

Keywords: Exchange rates; Monetary policy; General-to-speciï¬ c approach; Partial cointegrated vector autoregressive models; Structural breaks. (search for similar items in EconPapers)
JEL-codes: C22 C32 C52 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ets, nep-for, nep-mon and nep-ore
Date: 2019-01-07
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