Results

Abstract

One aim of this work was to explain the causes of the fluctuations in the mark/dollar, pound/dollar, and yen/dollar real exchange rate and to draw some policy conclusions from them. For every ECM, the fundamentals of the two-country overshooting model had at least some transitory influence on the corresponding real exchange rates. Changes in some fundamentals led also to changes of real exchange rates in the long-run. Moreover, the overshooting model also seems to have some power to explain movements of the three real exchange rates because the forecasting performance of the overshooting model in error correction form was satisfactory for the three exchange rate models. Since “news” with respect to fundamentals had little explanatory power to explain the movements of the considered real exchange rates, a large part of the transitory components had been due to causes of covariance-stationary excessive real exchange rate movements. Because of the stationarity of the transitory component nonstationary excessive real exchange movements can be excluded from the transitory components. These are real exchange rate movements caused by announced changes of stochastic processes of fundamentals (process switching or regime shifts), rational speculative bubbles, and learning processes. The weak evidence with respect to the last two causes of real exchange movements coincides with results of other empirical studies in the literature.