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    Do Market Fundamentals Determine the Dollar-Euro Exchange Rate?

    Access Status
    Fulltext not available
    Authors
    Apergis, Nicholas
    Zestos, G.
    Shaltayev, D.
    Date
    2012
    Type
    Journal Article
    
    Metadata
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    Citation
    Apergis, Nicholas and Zestos, George K. and Shaltayev, Dmitriy S. 2012. Do Market Fundamentals Determine the Dollar-Euro Exchange Rate? Journal of Policy Modeling. 34 (1): pp. 1-15.
    Source Title
    Journal of Policy Modeling
    DOI
    10.1016/j.jpolmod.2011.10.003
    ISSN
    0161-8938
    URI
    http://hdl.handle.net/20.500.11937/31149
    Collection
    • Curtin Research Publications
    Abstract

    The study searches for an optimal Dollar–Euro exchange rate policy for the US and the Euro Area (EA) countries. To achieve this, it explores the causal links between the US Dollar–Euro exchange rate and three key macroeconomic variables. The empirical investigation is carried out in an Error Correction Vector Autoregressive (ECVAR) framework based on the theory of cointegration and error-correction representation of cointegrated variables. The results provide evidence in favor of the presence of a long-run relationship between the exchange rate and the spread between US and EA (Eurozone) interest rates. With respect to the direction of causality, the empirical findings show that in the long and short-run there is a uni-directional causal relationship between interest-rate spreads and the US Dollar–Euro exchange rate. This result constitutes a strong message for policy advising to fiscal and monetary authorities on both sides of the Atlantic, and beyond.

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