Real exchange rate persistence: The case of the Swiss franc-US dollar rate

March 3, 2015
Issue 2015-03

Summary

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 that are consistent with the observed pronounced persistence in Swiss-US parity conditions. Generally, the results provide support for models allowing expectations formation in financial markets to be based on imperfect information.

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Issue:
03
Pages:
41
JEL classification:
C32, C51, F31
Keywords:
Long swings, Imperfect Knowledge, I(2) analysis, Self-reinforcing feed-back
Year:
2015

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Author(s)

  • Katarina Juselius

  • Katrin Assenmacher

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