Exchange rates and fundamentals

Description

"We show analytically that in a rational expectations present value model, an asset price manifests near random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the well known puzzle that fundamental variables such as relative money supplies, outputs, inflation and interest rates provide little help in predicting changes in floating exchange rates. As well, we show that the data do exhibit a related link suggested by standard models - that the exchange rate helps predict these fundamentals. The implication is that exchange rates and fundamentals are linked in a way that is broadly consistent with asset pricing models of the exchange rate"--National Bureau of Economic Research web site.

Subjects

Series Statement

• NBER working paper series ;
• working paper 10723
• Working paper series (National Bureau of Economic Research : Online) ;
• working paper no. 10723.

Links

• URL
• http://papers.nber.org/papers/W10723

Other Editions

• Exchange rates and fundamentalsNational Bureau of Economic Research2004-01-01
• Exchange rates and fundamentalsElectronic resourceNational Bureau of Economic Research2004