This paper revisits the association between exchange rates andmonetary fundamentals with the focus on both linear and nonlinear\napproaches.With the monthly data of Euro/US dollar and Japanese yen/US dollar, our linear analysis demonstrates the monetary\nmodel is a long-run description of exchange rate movements, and our nonlinear modelling suggests the error correction model\ndescribes the short-run adjustment of deviations of exchange rates, and monetary fundamentals are capable of explaining exchange\nrate dynamics under an unrestricted framework.
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