Working Paper: NBER ID: w3543
Authors: Robert P. Flood; Andrew K. Rose; Donald J. Mathieson
Abstract: In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System are used to explore the importance of non-linearities in the relationship between the exchange rates and fundamentals. Many implications of existing "target-zone" exchange rate models are tested; little support is found for existing non-linear models of limited exchange rate flexibility.
Keywords: exchange rates; target zones; nonlinearities
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rates (F31) | fundamental determinants (F30) |
| nonlinearities in exchange rate conditional means (C22) | existing target zone models (E17) |
| exchange rates (F31) | models of fixed exchange rates (F31) |
| nonlinear relationships (C29) | empirical findings (C90) |