Nonlinearities in exchange rate determination in a small open economy: Some evidence for Canada |
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| Affiliation: | 1. Department of Economics, University of Muenster, Universitätsstr. 14-16, 48143 Muenster, Germany;2. Department of Economics, University of Muenster, Germany;1. University of Pretoria, South Africa;2. Helmut Schmidt University, Germany;3. University of Nebraska at Omaha, United States;4. University of Nebraska-Omaha and Loughborough University, United States;1. The Australian National University, Australia;2. Macquarie University, Australia;3. Edith Cowan University, Australia;1. John Molson School of Business, Concordia University, Montreal, QC H3G 1M8, Canada;2. Faculty of Business Administration, Memorial University of Newfoundland, St. John’s NL A1B 3X5, Canada;1. Department of Economics and Quantitative Methods, Westminster Business School, University of Westminster, London NW1 5LS, UK;2. Department of Economics and IME, University of Salamanca, Salamanca, Spain;1. School of Finance, Jiangxi University of Finance and Economics, Nanchang 330013, China;2. School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 610054, China;3. Odette School of Business, University of Windsor, Windsor, Ontario, Canada N9B 3P4 |
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| Abstract: | We analyze bilateral Canadian-US dollar exchange rate movements within a Markov switching framework with two states, one in which the exchange rate is determined by the monetary model, and the other in which its behavior follows the predictions of a Taylor rule exchange rate model. There are a number of regime switches throughout the estimation period 1991:2–2008:12 which we can each relate to particular changes in Canadian monetary policy. These results imply that an active monetary policy stance may account for nonlinearities in the exchange rate-fundamentals nexus. The strong evidence of nonlinearities also confirms the notion that exchange rate movements cannot be explained exclusively in terms of any one particular exchange rate model. |
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