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Exchange Rate Determination: Mixed Microstructural and Macroeconomic Approach

Author

Listed:
  • Ali Trabelsi Karoui

    (University of Sfax. Sfax, Tunisia.)

  • Aida Kammoun

    (University of Sfax. Sfax, Tunisia.)

Abstract

This paper represents a new approach in the exchange rate determination by using microstructural and macroeconomic variables. We test a combination of fundamentals and microstructure variables in cointegrated relationship of the USD/JPY and USD/GBP currencies pairs. The twofold model includes interest rate, money supply and net foreign assets as fundamentals, and spread and high-low spread as a microstructure variable. Then we compare the different models of macroeconomic and twofold model with the random walk using an error-correction method. We find that the twofold model outperforms the random structural model in out-of-sample and in-sample forecast test for both exchange rates. Twofold model outperforms in out-of-sample forecast the random walk test for the USD/JPY.

Suggested Citation

  • Ali Trabelsi Karoui & Aida Kammoun, 2021. "Exchange Rate Determination: Mixed Microstructural and Macroeconomic Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 11(3), pages 89-106.
    • Handle: RePEc:eco:journ1:2021-03-11
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    More about this item

    Keywords

    exchange rate; spreads; interest rate; money supply; net foreign assets; twofold model; cointegration;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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