A Network Model of Multilaterally Equilibrium Exchange Rates
July 6, 2016
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Summary
This paper proposes a network model of multilaterally equilibrium exchange rates. The model introduces a topological component into the exchange rate analysis, consistently taking into account simultaneous higher-order interactions among all currencies. The paper defines the currency demand indicator. On its base, it derives a multilateral exchange rate network, finds its dynamically stationary position, and identifies the multilaterally equilibrium levels of bilateral exchanges rates. Potentially, the model can be developed further to calculate the deviations of the observed bilateral exchange rates from their multilaterally equilibrium levels, which can be interpreted as their over- or undervaluation. For illustration, the model is applied to daily 1995-2016 exchange rates among 130 currencies sourced from the Thomson Reuters Datastream.
Subject: Currencies, Currency markets, Exchange rate modelling, Exchange rates, Financial markets, Foreign exchange, Money, Reserve currencies
Keywords: base currency, Currencies, Currency markets, currency pair, equilibrium, equilibrium exchange rates, exchange rate, Exchange rate modelling, exchange rate network, Exchange rates, Global, network, network consist, network stationarity, networks, Reserve currencies, trade, world currency market, WP
Pages:
23
Volume:
2016
DOI:
Issue:
130
Series:
Working Paper No. 2016/130
Stock No:
WPIEA2016130
ISBN:
9781498351331
ISSN:
1018-5941
