Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/78367 
Year of Publication: 
2002
Series/Report no.: 
Diskussionsbeitrag No. 266
Publisher: 
Universität Hannover, Wirtschaftswissenschaftliche Fakultät, Hannover
Abstract: 
This paper extends the real interest differential (RID) model of Frankel (1979) by introducing Markov regime switches for three exchange rates over the years 1973 - 2000. Evidence of a non-linear relationship between exchange rates and underlying fundamentals is provided. One of the regimes represents exactly the RID case. Decisive fundamentals in determining regimes turn out to be mainly interest rates. The established relationship is shown to be stable in several respects: regimes are highly persistent, provide a much better description of the data than alternatives and are robust towards several modifications.
Subjects: 
Markov switching model
monetary model of the exchange rate
real interest differential (RID) model (Frankel 1979)
JEL: 
F31
Document Type: 
Working Paper

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