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On exchange rate comovements: New evidence from a Taylor rule fundamentals model with adaptive learning

Author

Listed:
  • Cyril Dell'Eva

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Gilles de Truchis

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Benjamin Keddad

    (PSB - Paris School of Business - HESAM - HESAM Université - Communauté d'universités et d'établissements Hautes écoles Sorbonne Arts et métiers université)

Abstract

This paper proposes a flexible theoretical framework to assess the conditions under which long-run comovements are likely to appear between exchange rates. We introduce a three-country extension of the Taylor rule fundamentals model with adaptive learning. Moreover, economies are affected by common and/or country-specific shocks and react according to the preferences of central banks. The simulation results suggest that the extent to which exchange rates comove in the long run strongly depends on the extent of linkages between economies and the purchasing power parity of exchange rates. Indeed without similar Taylor rules in two economically linked countries, exchange rates comovements disappear. We pursue our theoretical analysis using real data and find strong evidence of fractional cointegration between several European exchange rates.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Cyril Dell'Eva & Gilles de Truchis & Benjamin Keddad, 2017. "On exchange rate comovements: New evidence from a Taylor rule fundamentals model with adaptive learning," Post-Print hal-04847446, HAL.
    • Handle: RePEc:hal:journl:hal-04847446
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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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