The contribution of economic fundamentals to movements in exchange rates
journal contribution
posted on 2014-07-09, 08:53authored byNathan S. Balke, Jun Ma, Mark Wohar
Starting from the asset pricing approach of Engel and West, we examine the degree to which fundamentals can explain exchange rate fluctuations. We show that it is not possible to obtain sharp inferences about the relative contribution of fundamentals using only data on observed monetary fundamentals—money minus output differentials across countries—and exchange rates. We use additional data on interest rate and price differentials along with the implications of the monetary model of exchange rates to decompose exchange rate fluctuations. In general, we find that money demand shifts, along with observed monetary fundamentals, are an important contributor to exchange rate fluctuations.
History
School
Business and Economics
Department
Business
Citation
BALKE, N.S., MA, J,. and WOHAR, M.E., 2013. The contribution of economic fundamentals to movements in exchange rates. Journal of International Economics, 90, pp. 1 - 16