Macroeconomic determinants of exchange rates: a frequency-specific analysis

Abstract

This paper applies a new methodology, rolling spectral regression, to investigate currency movements at various frequencies. This technique generates efficient and frequency-band estimates of the regression coefficients between three major exchange rates and their determinants from a generic monetary model. Empirical results reported in this study suggest that the variations of the yen/dollar and pound/dollar exchange rates can be explained by changes in monetary policy in the long run and fluctuations in economic growth and long-term interest rates in the medium run