@techreport{Cayen2010What,
abstract = {We use a novel approach to identify economic developments that drive exchange rates in the long run. Using a panel of six quarterly U.S. bilateral real exchange rates  Australia, Canada, the euro, Japan, New Zealand and the United Kingdom  over the 1980-2007 period, a dynamic factor model points to two common factors. The first factor is driven by U.S. shocks, and cointegration analysis points to a long-run statistical relationship with the U.S. debt-to-GDP ratio, relative to all other countries in our sample. The second common factor is driven by commodity prices. Incorporating these relationships directly into a state-space model, we find highly significant coefficients. Then, we decompose the historical variation of each exchange rate into U.S. shocks, commodities, and a domestic component. We find a strong role for economic fundamentals: Changes in the two common factors, which are driven by the (relative) U.S. debt-to-GDP ratio and commodity prices, can explain between 36 and 96 per cent of individual countries' exchange rates in our panel.},
address = {Ottawa},
author = {Jean-Philippe Cayen and Donald Coletti and Ren\'{e} Lalonde and Philipp Maier},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {J31; 330; Exchange rates; Econometric and statistical methods; Wechselkurs; \"{O}ffentliche Schulden; Volkswirtschaft; US-Dollar; Australien; Kanada; Neuseeland; Gro\ss{}britannien; Europ\"{a}ische Wirtschafts- und W\"{a}hrungsunion; Japan},
language = {eng},
number = {2010,5},
publisher = {Bank of Canada},
title = {What drives exchange rates? New evidence from a panel of US dollar bilateral exchange rates},
type = {Bank of Canada Working Paper},
url = {http://hdl.handle.net/10419/53939},
year = {2010}
}
