Trend Fundamentals and Exchange Rate Dynamics
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Date
2015-09
Publication Type
Working Paper
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yes
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Abstract
We estimate a multivariate unobserved components-stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US Dollar. The empirical model is based on the assumption that both countries' monetary policy strategies may be well described by Taylor rules with a time-varying inflation target, a time-varying natural rate of unemployment, and interest rate smoothing. The estimates closely track major movements along with important time-series properties of the real and nominal exchange rates across all currencies considered. The model generally outperforms a simple benchmark model that does not account for changes in trend inflation and trend unemployment.
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published
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Volume
393
Pages / Article No.
Publisher
KOF Swiss Economic Institute, ETH Zurich
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Subject
UNEMPLOYMENT; UNITED STATES DOLLAR (GELDWESEN); STOCHASTIC MODELS + STOCHASTIC SIMULATION (PROBABILITY THEORY); UNITED STATES DOLLAR (MONETARY SYSTEM); Trend inflation; Natural rate of unemployment; VOLATILITÄT (FINANZEN); Exchange rate models; STOCHASTISCHE MODELLE + STOCHASTISCHE SIMULATION (WAHRSCHEINLICHKEITSRECHNUNG); Unobserved components-stochastic volatility model; ARBEITSLOSIGKEIT; WECHSELKURS; EXCHANGE RATE; VOLATILITY (FINANCE); Taylor rule
Organisational unit
02525 - KOF Konjunkturforschungsstelle / KOF Swiss Economic Institute
03716 - Sturm, Jan-Egbert / Sturm, Jan-Egbert