Real Exchange Rate Persistence: The Case of the Swiss Franc-US Dollar Rate

37 Pages Posted: 14 Nov 2014

See all articles by Katarina Juselius

Katarina Juselius

University of Copenhagen - Department of Economics

Katrin Assenmacher

Swiss National Bank

Date Written: November 10, 2014

Abstract

Asset prices tend to undergo wide swings around long-run equilibrium values which can have detrimental effects on the real economy. To get a better understanding of how the financial sector and the real economy interact this paper models the long swings in the Swiss franc-US dollar foreign currency market using the I(2) Cointegrated VAR model. The results show strong evidence of self-reinforcing feedback mechanisms in the Swiss-US foreign exchange market consistent with the observed pronounced persistence in the Swiss-US parity conditions. Generally, the results provide support for models allowing expectations formation in financial markets to be based on imperfect information.

Keywords: Long swings, Imperfect Knowledge, I(2) analysis, Self-reinforcing feed-back

JEL Classification: C32, C51, F31

Suggested Citation

Juselius, Katarina and Assenmacher, Katrin, Real Exchange Rate Persistence: The Case of the Swiss Franc-US Dollar Rate (November 10, 2014). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 14-26, Available at SSRN: https://ssrn.com/abstract=2523907 or http://dx.doi.org/10.2139/ssrn.2523907

Katarina Juselius (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Katrin Assenmacher

Swiss National Bank ( email )

Borsenstrasse 15
CH-8022 Zurich
Switzerland

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