The multiscale relationship between exchange rates and fundamentals differentials: Empirical evidence from Scandinavia

Habimana, Olivier (2017): The multiscale relationship between exchange rates and fundamentals differentials: Empirical evidence from Scandinavia.

Abstract

This paper investigates the extent to which macroeconomic fundamentals explain movements in the Swedish Krona against the Danish Krone and the Norwegian Krone exchange rates; three currencies of neighboring countries that are main trade partners and with long-term economic similarities. Exchange rates and fundamentals are decomposed into wavelet scales to gauge the explanatory power of the monetary model at different frequencies. There is a significant relationship between interest rate, inflation, and to a lesser extent the stock of money and output differentials and in-sample exchange rates movements at horizons of eight months and above. Wavelet decomposition uncovers the time scale aspect of exchange rate determination, and suggests that the monetary model is still a useful framework at medium and long horizons.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate disconnect puzzle, monetary model, Scandinavia, wavelets.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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