Unraveling the Complex Interrelationships between Exchange Rates and Fundamentals

60 Pages Posted: 17 Jul 2006 Last revised: 24 Jan 2012

See all articles by Austin Murphy

Austin Murphy

Oakland University - School of Business Administration

Yun Ellen Zhu

Oakland University

Date Written: July 8, 2006

Abstract

This research provides insights on puzzling exchange rate phenomena. Empirical support is supplied for forward rates incorporating a small probability of a large spot decline when a current account deficit exists. Investors are found to expect countries to be more likely to choose devaluation solutions to BOP problems when inflation is lower and when the solution of a drop in real income growth is more 'painful'. Evidence is uncovered of currency unions positively (negatively) impacting investor confidence in formerly weaker (stronger) currencies. The U.S. Presidential election effect on exchange rates is discovered to have some relationship to fundamentals.

Suggested Citation

Murphy, J. Austin and Zhu, Yun Ellen, Unraveling the Complex Interrelationships between Exchange Rates and Fundamentals (July 8, 2006). Journal of Banking and Finance, Vol. 32, 2008, Available at SSRN: https://ssrn.com/abstract=916045

J. Austin Murphy (Contact Author)

Oakland University - School of Business Administration ( email )

Varner Hall - Room 502
Rochester, MI 48309-4401
United States
248-370-2125 (Phone)
248-370-4275 (Fax)

Yun Ellen Zhu

Oakland University ( email )

419 Elliott Hall
Rochester, MI 48309-4401
United States