Abstract

This paper investigates the relationship between fluctuations in spot exchange rates and macroeconomic news.  It develops an exchange rate model that decomposes the exchange rate into both permanent and temporary components, and show that the news is linked to the temporary component of the exchange rate. Empirical findings suggest that unexpected changes in salient macroeconomic variables—the news—contribute significantly to fluctuations in the temporary component of the nominal exchange rate. This result is robust across major currencies.

This work is licensed under a Creative Commons Attribution 4.0 License.