Exchange Rates and Fundamentals in Developed and Emerging Markets

• Main Author: Laurel, Rocky K
• Format: text
• Published: Animo Repository 2024
• Subjects: currencies; emerging markets; exchange rate predictability; flexible price; foreign exchange; international finance; monetary model; out-of-sample; random walk
• Online Access: https://animorepository.dlsu.edu.ph/ber/vol34/iss1/5
• Institution: De La Salle University

This paper investigates the relationship between exchange rates on the one hand and money supply and real output on the other, then compares the relationship in developed and emerging markets. It tests the validity of the flexible price monetary model using in-sample analysis to determine if there are long-term relationships among the variables and out-of-sample analysis to compare the predictive performance of the model against a random walk. It finds evidence for a relationship as predicted by the model, contrary to long-standing findings of no relationship. It also finds some evidence that foreign exchange rates of emerging markets are more predictable compared to those of developed markets.