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Covariability of real exchange rates and fundamentals

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  • Grisse, Christian
  • Scheidegger, Fabian

Abstract

We study low-frequency correlations between real exchange rates (RERs) and fundamentals using historical data starting in 1870. Increases in real GDP per capita – a proxy for the Balassa–Samuelson effect – and terms of trade improvements in the United States relative to advanced economies are associated with stronger US dollar RERs, as predicted by economic theory. For several other fundamentals considered in the literature, we find no evidence of robust low-frequency correlations with RERs.

Suggested Citation

  • Grisse, Christian & Scheidegger, Fabian, 2021. "Covariability of real exchange rates and fundamentals," Economics Letters, Elsevier, vol. 201(C).
    • Handle: RePEc:eee:ecolet:v:201:y:2021:i:c:s0165176521000598
    DOI: 10.1016/j.econlet.2021.109782
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    References listed on IDEAS

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    More about this item

    Keywords

    Real exchange rates; Balassa–Samuelson effect; Low-frequency correlation; Historical data;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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