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| Author: | Sarno, L. Valente, G. |
| Title: | Exchange rates and fundamentals: Footloose or evolving relationship? |
| Journal: | Journal of the European Economic Association
2009 : JUN, VOL. 7:4, p. 786-830 |
| Index terms: | exchange rates dollars |
| Language: | eng |
| Abstract: | This study employs a predictive procedure that allows the relationship between exchange rates and fundamentals to evolve over time in a very general fashion. The study uses novel real-time data on a broad set of economic fundamentals for five major US dollar exchange rates over the recent float. The results reveal that the well-documented weak out-of-sample predictive ability of exchange rate models may be caused by poor performance of model-selection criteria, rather than lack of information content in the fundamentals. The difficulty of selecting the best predictive model is largely due to frequent shifts in the set of fundamentals driving exchange rates, which can be interpreted as reflecting swings in market expectations over time. However, the findings indicate that the strength of the link between exchange rates and fundamentals is different across countries. |
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