The dollar-euro exchange rate and monetary fundamentals

Abstract This study analyses the relationship between the dollar-euro exchange rate and macroeconomic fundamentals according to the monetary model after 1999. Multivariate and time-varying univariate cointegration techniques are used to test for a long-run equilibrium and changes in the underlying coefficients. Our results provide clear evidence of a long-run relationship between exchange rates and fundamentals. However, we find significant changes in the economic impact of fundamentals on the dollar-euro exchange rate. Both long-run and the short-run coefficients are shown to be strongly time-varying and significantly affected by the financial crisis and the emergence of unconventional monetary policy