The multiscale relationship between exchange rates and fundamentals differentials: Empirical evidence from Scandinavia

Olivier Habimana

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the extent to which macroeconomic fundamentals explain movements in the Swedish Krona against the Danish Krone and the Norwegian Krone exchange rates; three currencies of neighboring countries that are main trade partners and with long-term economic similarities. Exchange rates and fundamentals are decomposed into wavelet scales to gauge the explanatory power of the monetary model at different frequencies. There is a significant relationship between interest rate, inflation, and to a lesser extent the stock of money and output differentials and in-sample exchange rates movements at horizons of eight months and above. Wavelet decomposition uncovers the time scale aspect of exchange rate determination, and suggests that the monetary model is still a useful framework at medium and long horizons.

Keywords: Exchange rate disconnect puzzle; monetary model; Scandinavia; wavelets. (search for similar items in EconPapers)
JEL-codes: E44 F3 F31 (search for similar items in EconPapers)
Date: 2017-01-03
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:75956

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