Abstract
Perhaps, the least understood area of macroeconomics is the exchange rate determination. The fluctuations and trends of the major currencies - US dollar, Deutsche Mark, pound sterling and yen - experienced in the last 15 years, and since January 1999 by the euro, are hardly compatible with the main exchange rate theories. A particular determinant, say, short-term interest differentials, yield differentials, relative current account balances, money supply differentials or relative prices of goods, is generally failing to explain systematic movements in the key currencies. This failure is exemplified in models with time-varying coefficients, where a particular determinant is totally unstable. Its influence over time changes from being extremely important, compatible with the underlying theory (correct sign), to unimportant over another period and even with the wrong sign over previous periods. The general verdict among theoreticians and practitioners is that we do not know what drives currencies.
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.
