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Title: |
Balassa-Samuelson Theory and Predictability of the US-UK Real Exchange
Rate |
| Author: |
Kim, Chung-Han |
| Author
Affiliation: |
Korea Institute
of Finance |
| Source: |
International Economic Journal, Autumn 2000, v. 14, no. 3, pp. 101-121 |
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Publication Date: |
Autumn 2000 |
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Abstract: |
This paper performs a theory-based
forecast of the US/UK real exchange rate. The theory is the
Balassa-Samuelson hypothesis that productivity differentials between two
countries would determine long-run movements of real exchange rates. The
relative income and real exchange rate set a bivariate system, which
considers the heteroskedasticity in the real exchange rate movements.
The model, to which the Kalman filter and Markov-switching algorithm are
applied, is compared with the random walk model and reports significant
improvements in forecasting in the medium and long term. |
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