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Trend Fundamentals and Exchange Rate Dynamics

Huber, Florian and Kaufmann, Daniel (2016) Trend Fundamentals and Exchange Rate Dynamics. Department of Economics Working Paper Series, 214. WU Vienna University of Economics and Business, Vienna.

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Abstract

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 both 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. The estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered. The model generally outperforms a benchmark model that does not account for changes in trend inflation and trend unemployment. (authors' abstract)

Item Type: Paper
Keywords: Exchange rate models / trend inflation / natural rate of unemployment / Taylor rule / unobserved components stochastic volatility model
Classification Codes: JEL F31, E52, F41, C5, E31
Divisions: Departments > Sozioökonomie
Departments > Volkswirtschaft
Depositing User: Claudia Tering-Raunig
Date Deposited: 19 Jan 2016 13:44
Last Modified: 25 Feb 2016 12:19
URI: http://epub.wu.ac.at/id/eprint/4808

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