DP2210 | Currency Spillovers and Tri-Polarity: A Simultaneous Model of the US Dollar, German Mark and Japanese Yen

Publication Date

31/08/1999

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Abstract

This paper presents a simultaneous model of exchange rates between the three major countries. In addition to incorporating long-run equilibria and short-run dynamics, the model is designed to capture complex interactions between currencies not normally considered in exchange rate models. These interactions are shown to be important via generalised impulse response analysis, and the model as a whole to be an economically and statistically superior forecasting tool over relatively short horizons.