Abstract
I study the asset approach to exchange rates in the time–frequency domain. Using Australian data, I show that the Granger causality runs from the exchange rate to commodity prices – a proxy for economic fundamentals. This result holds at any point in time at business cycle and higher frequencies confirming the exchange rate present-value framework.
Acknowledgements
I am grateful to the University of Cambridge for financial support. All errors and omissions are mine.
Notes
1 The use of wavelets in economics is still limited. For recent contributions see Rua (Citation2010), McLoughlin (Citation2010) and Trezzi (Citation2013).
2 Conventionally, high frequencies are periods up to 2 years, business cycle frequencies are cycles between 2 and 8 years, low frequencies are cycles longer than 8 years.
3 The only exception is during the 1980s for the spot exchange rate and only at high frequencies.