Taylor Rule Based Model of Exchange Rate with Wealth Effects

Currencies like other financial assets fluctuate daily and are influenced by a variety of factors. The high volatility and complex nature of exchange rates make them very difficult to model. Since the start of the floating exchange rate era the puzzle as to how exchange rates are linked to macroeconomic fundamentals has been one of the central challenges confronting international economics. This book provides relevant concepts and frameworks for exchange rate studies and discusses exchange rate studies in several aspects. - Overview the history of the FX market and exchange rate regimes - Review of the main macroeconomic exchange rate models in the exchange rate literature including their forecasting ability and limitations. - Models of the Taylor rule and a Taylor rule based exchange rate model incorporating wealth effects as represented by both asset prices and asset wealth. - Out-of-sample forecast performance of both the wealth augmented Taylor rule model and Taylor rule exchange rate model. This book can serves as a valuable supplement for courses on economics international finance at upper-undergraduate and graduate levels.