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Non-linearities in the relation between the exchange rate and its fundamentals

Altavilla, Carlo and de Grauwe, Paul (2010) Non-linearities in the relation between the exchange rate and its fundamentals. International Journal of Finance and Economics, 15 (1). pp. 1-12. ISSN 1076-9307

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Identification Number: 10.1002/ijfe.384

Abstract

We develop a simple theoretical model in which chartists and fundamentalists interact. The model predicts the existence of different regimes, and thus non-linearities in the link between the exchange rate and its fundamentals. We test the model empirically by adopting a Markov-switching vector error correction model. The results suggest the presence of non-linear mean reversion in the nominal exchange rate process. The implications are that different sets of macroeconomic fundamentals act as driving forces of the exchange rates during different time periods.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1002/%28...
Additional Information: © 2010 John wiley & Sons
Subjects: H Social Sciences > HG Finance
J Political Science > JZ International relations
JEL classification: F - International Economics > F3 - International Finance > F31 - Foreign Exchange
Sets: Departments > European Institute
Collections > Economists Online
Date Deposited: 05 Oct 2012 14:17
Last Modified: 05 Oct 2012 14:17
URI: http://eprints.lse.ac.uk/id/eprint/46609

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