Trend Fundamentals and Exchange Rate Dynamics

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HUBER Florian KAUFMANN Daniel

Rok publikování 2020
Druh Článek v odborném periodiku
Časopis / Zdroj Economica
Fakulta / Pracoviště MU

Ekonomicko-správní fakulta

Citace
www https://onlinelibrary.wiley.com/doi/full/10.1111/ecca.12334
Doi http://dx.doi.org/10.1111/ecca.12334
Klíčová slova Trend Fundamentals; Exchange Rate Dynamics
Přiložené soubory
Popis We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US dollar. The empirical model is based on the assumption that two countries’ monetary policy strategies may be well described by Taylor rules with a time-varying inflation target, a time-varying natural rate of unemployment, and interest rate smoothing. Compared to the existing literature, our model simultaneously provides estimates of the latent components included in a typical Taylor rule specification and the model-based real exchange rate. Our estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered, outperforming a benchmark model that does not account for changes in trend inflation and trend unemployment. More precisely, the proposed approach improves on competing models in tracking the actual evolution of the real exchange rate in terms of simple correlations while it appreciably improves on simpler competitors in terms of matching the persistence of the real exchange rate.
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