Abstract

Structural Exchange-Rate Relations in International Foreign Exchange Markets

The existing theory of the behaviour of flexible exchange rates, including empirical analyses, is based primarily on the results of studies involving two countries. This paper, by contrast, studies within the framework of a multilateral system common behavioural aspects of the most important exchange rates in the period following the collapse of the Bretton-Woods system. If focuses among other things on the implications of the European Monetary System (EMS) for Member and non-Member States in particular. On the basis of studies of multivariate time-series, the most important nominal exchange rates have been examined with regard to their co-integrative relationships, effective in the long term, as well as to their behavioural dynamism. As the results of empirical studies show, there is a relatively modest correlation between the yen/US dollar rate and the other European exchange rates, whilst the D-mark/US dollar rate deserves to be given the greatest importance within the vector-autoregressive system studied. Since the inception of the EMS, there has been an equilibrium relationship between the D-mark/US dollar rate and the British pound as well as the Swiss-franc rate; this equilibrium relationship has guided these exchange rates in the long term. The French franc and the Italian lira - although members of the EMS - do not exert any influence on the nature of this relationship; their only long-term function is one of adjustment. Even dynamic analyses based on forecasting error-variance decomposition and impulse response series underline the dominant role of the D-mark/dollar rate especially since the early days of the EMS. The results of this study thus show that dependencies of a short and a long-term nature evolve in exchange-rate relations over time that should be taken account of when exchange-rate models are shaped.