Filtering the Beer - A Permanent and Transitory Decomposition

by Peter B. Clark

As the exchange rates of many industrial and developing countries have shown substantial fluctuations over the past 25 years, there has been considerable interest in exploring the factors that may be able to account for these movements. In particular, the substantial changes in the nominal and real exchange value of the U.S. dollar, the yen and the pound sterling have raised questions as to whether exchange rates are driven in a systematic fashion by fundamental economic forces or are more a reflection of the perhaps irrational whims of market participants.1 In attempting to answer this question, one strand of analysis has tried to identify a relatively small set of economic variables that can be used to explain these movements and to ascertain the extent to which exchange rates are misaligned, i.e., can be said to depart from economic fundamentals.

78 pages, Kindle Edition

First published August 1, 2000