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Are exchange rates determined by macroeconomic factors?

Author

Listed:
  • Geoffrey Williams
  • Ashok Parikh
  • David Bailey

Abstract

In this study, we consider 15 countries and examine the relationship between exchange rate volatility and macroeconomic volatility. We show that, in general, empirical support for the existence of a link between exchange rates and macroeconomic fundamentals is very weak and that other factors are more important in casting light on the behaviour of exchange rates. In particular, we investigate the links between risk premia and exchange rates across our sample of countries. Using ARCH and GARCH techniques, we illustrate that despite the targeting policies of the ERM, risk premia are evident for the majority of countries in our sample.

Suggested Citation

  • Geoffrey Williams & Ashok Parikh & David Bailey, 1998. "Are exchange rates determined by macroeconomic factors?," Applied Economics, Taylor & Francis Journals, vol. 30(4), pages 553-567.
    • Handle: RePEc:taf:applec:v:30:y:1998:i:4:p:553-567
    DOI: 10.1080/000368498325813
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    References listed on IDEAS

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    1. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August.
    2. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 669-682.
    3. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    4. Richard T. Baillie & Tim Bollerslev, 1991. "Intra-Day and Inter-Market Volatility in Foreign Exchange Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 565-585.
    5. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
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