Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152682
Authors: 
Engel, Charles
West, Kenneth D.
Year of Publication: 
2003
Series/Report no.: 
ECB Working Paper 248
Abstract: 
Standard economic models hold that exchange rates are influenced by fundamental variables such as relative money supplies, outputs, inflation rates and interest rates. Nonetheless, it has been well documented that such variables little help predict changes in floating exchange rates -- that is, exchange rates follow a random walk. We show that the data do exhibit a related link suggested by standard models ­ that the exchange rate helps predict fundamentals. We also 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 suggest that this may apply to exchange rates.
Subjects: 
asset price
Exchange Rates
monetary model
present value
random walk
JEL: 
F31
F37
G15
G12
Document Type: 
Working Paper

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