Do fundamentals matter for the D-Mark/Euro - Dollar? : A regime switching approach

Arbeitspapier

In this paper we demonstrate that there is evidence of an unstable and nonlinear relationship between fundamentals and exchange rates. Modeling this time-varying nature of the importance of fundamentals in a Markov switching framework substantially improves the fit of the real interest rate differential model and leads to parameter estimates, which in one regime are in line with theoretical expectations and allow us to draw reasonable conclusions on the influence of fundamentals on exchange rate dynamics. Factors which prove to be closely related to regime switches are short term interest rate, inflation differentials and differences in economic growth. Therefore fundamentals do not only matter for the exchange rate within each regime, but are also related to the switches between the regimes.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Diskussionsbeitrag ; No. 289

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange
• Subject: Exchange rate modeling ; real interest rate differential model ; Markov switching model ; Wechselkurs ; Wertpapieranalyse ; Zinsdifferenz ; Markovscher Prozess ; Schätzung ; Deutschland ; EU-Staaten ; Vereinigte Staaten ; Markov-Switching-Model

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Menkhoff, Lukas ; MacDonald, Ronald ; Froemmel, Michael
• Event: Veröffentlichung
• (who): Universität Hannover, Wirtschaftswissenschaftliche Fakultät
• (where): Hannover
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/22401