Do fundamentals matter for the D-Mark/Euro–Dollar? A regime switching approach

@inproceedings{Frmmel2003DoFM,
  title={Do fundamentals matter for the D-Mark/Euro–Dollar? A regime switching approach},
  author={Michael Fr{\"o}mmel and Ronald Macdonald and Lukas Menkhoff},
  year={2003}
}
In this paper, we demonstrate that there is evidence of an unstable and nonlinear relationship between fundamentals and exchange rates. Modeling this time-varying nature of the importance of fundamentals in a Markov switching framework substantially improves the fit of the real interest rate differential model and leads to parameter estimates, which in one regime are in line with theoretical expectations and allow us to draw reasonable conclusions on the influence of fundamentals on exchange… CONTINUE READING

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