Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)
Trend Fundamentals and Exchange Rate Dynamics
() and Daniel Kaufmann
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.
Keywords: Exchange rate models, trend inflation, natural rate of unemployment, Taylor rule, unobserved components stochastic volatility model; (follow links to similar papers)
JEL-Codes: F31,; E52,; F41,; C5,; E31; (follow links to similar papers)
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