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On the dynamic relationship of exchange rates and monetary fundamentals: an impulse-response analysis by local projections

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  • Tsung-Wu Ho

Abstract

Meese and Rogoff (1983) first examined the dynamic relationship between exchange rates and monetary fundamentals and indicated that monetary fundamentals do not contain predictive component of exchange rates changes at short horizon. This note re-examines this relationship by estimating the local projections (Jorda, 2005) to calculate the responses of the exchange rate to monetary fundamental impulse. As a result, we confirm the dynamic relationship: Evidence from both cubic and linear projections show that monetary fundamentals contain information of future exchange rate changes.

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  • Tsung-Wu Ho, 2008. "On the dynamic relationship of exchange rates and monetary fundamentals: an impulse-response analysis by local projections," Applied Economics Letters, Taylor & Francis Journals, vol. 15(14), pages 1141-1145.
    • Handle: RePEc:taf:apeclt:v:15:y:2008:i:14:p:1141-1145
    DOI: 10.1080/13504850600993689
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    References listed on IDEAS

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    1. Charles Engel & Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
    2. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May.
    3. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845, September.
    4. MacDonald, Ronald & Taylor, Mark P., 1994. "The monetary model of the exchange rate: long-run relationships, short-run dynamics and how to beat a random walk," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 276-290, June.
    5. Zellner, Arnold & Palm, Franz, 1974. "Time series analysis and simultaneous equation econometric models," Journal of Econometrics, Elsevier, vol. 2(1), pages 17-54, May.
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    7. Rapach, David E. & Wohar, Mark E., 2002. "Testing the monetary model of exchange rate determination: new evidence from a century of data," Journal of International Economics, Elsevier, vol. 58(2), pages 359-385, December.
    8. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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    Cited by:

    1. Stefano Puddu, 2013. "Real Sector and Banking System: Real and Feedback Effects. A Non-Linear VAR Approach," IRENE Working Papers 13-01, IRENE Institute of Economic Research.
    2. Ronayne, David, 2011. "Which Impulse Response Function?," The Warwick Economics Research Paper Series (TWERPS) 971, University of Warwick, Department of Economics.
    3. de Ridder, M. & Pfajfar, D., 2017. "Policy Shocks and Wage Rigidities: Empirical Evidence from Regional Effects of National Shocks," Cambridge Working Papers in Economics 1717, Faculty of Economics, University of Cambridge.

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