Trend fundamentals and exchange rate dynamics

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: KOF Working Papers ; No. 393

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange ; Monetary Policy ; Open Economy Macroeconomics ; Price Level; Inflation; Deflation
• Subject: exchange rate models ; trend ination ; natural rate of unemployment ; Taylor rule ; unobserved components-stochastic volatility model

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Huber, Florian ; Kaufmann, Daniel
• Event: Veröffentlichung
• (who): ETH Zurich, KOF Swiss Economic Institute
• (where): Zurich
• (when): 2015

Further information

• DOI: doi:10.3929/ethz-a-010513063
• Handle: http://hdl.handle.net/10419/126241
• Last update: 10.03.2025, 11:42 AM CET