Trend Fundamentals and Exchange Rate Dynamics

Florian Huber, Daniel Kaufmann

Publication: Working/Discussion PaperWU Working Paper

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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. (authors' abstract)
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 2016

Publication series

NameDepartment of Economics Working Paper Series
No.214

WU Working Paper Series

  • Department of Economics Working Paper Series

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