Abstract
Starting from the asset pricing approach of Engel and West, we examine the degree to which fundamentals can explain exchange rate fluctuations. We show that it is not possible to obtain sharp inferences about the relative contribution of fundamentals using only data on observed monetary fundamentals—money minus output differentials across countries—and exchange rates. We use additional data on interest rate and price differentials along with the implications of the monetary model of exchange rates to decompose exchange rate fluctuations. In general, we find that money demand shifts, along with observed monetary fundamentals, are an important contributor to exchange rate fluctuations.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
