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The Exchange Rate and Macroeconomic Determinants: Time-Varying Transitional Dynamics

Chunming Yuan

No 09-114, UMBC Economics Department Working Papers from UMBC Department of Economics

Abstract: In this paper, I consider modeling the effects of the macroeconomic determinants on the nominal exchange rate to be channeled through the transition probabilities in a Markovian process. The model posits that the deviation of the exchange rate from its fundamental value alters the market’s belief in the probability of the process staying in certain regime next period. This paper further takes into account the ARCH effects of the volatility of the exchange rate. Empirical results generally confirm that fundamentals can affect the evolution of the dynamics of the exchange rate in a nonlinear way through the transition probabilities. In addition, I find that the volatility of the exchange rate is associated with significant ARCH effects which are subject to regime change.

Keywords: Exchange Rate; Macroeconomic Determinants; Markov-Switching; ARCH; and Time-Varying (search for similar items in EconPapers)
JEL-codes: C32 F31 F37 F41 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2008-05-01, Revised 2009-11-01
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Related works:
Journal Article: The exchange rate and macroeconomic determinants: Time-varying transitional dynamics (2011) Downloads
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