Modelling and forecasting the dollar-pound exchange rate in the presence of structural breaks

Working paper

We employ a newly-developed partial cointegration system allowing for level shifts to examine whether economic fundamentals form the long-run determinants of the dollar-pound exchange rate in an era of structural change. The paper uncovers a class of local data generation mechanisms underlying long-run and short-run dynamic features of the exchange rate using a set of economic variables that explicitly re?ect the central banks' monetary policy stances and the in?uence of a forward exchange market. The impact of the Brexit referendum is evaluated by examining forecasts when the dollar-pound exchange rate fell substantially around the vote.

Authors: Castle, J

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2019-01-07
• Paper number: 866
• Keywords: exchange rates; structural breaks; partial cointegrated vector autoregressive models; monetary policy; general-to-speci?c approach