What are the short and long-term determinants of exchange ra

 Research proposal structure
What are the short and long-term determinants of exchange rates? 
Area and context of research
 For  many  years,  the  fluctuation  of  exchange  rate  has  always  been  an  interesting  topic  for  many researchers. Most economists think that the volatility of exchange rates are driven by macroeconomic phenomena  (Rose,  1994). However,  since  the  1980s, many  researchers  have  thrown  doubt  on  the explanation  of  exchange  rate  using  macroeconomic  model.  Flood  and  Rose  (1995)  said  that  the exchange  rate  ‘appears  to  have  a  life  of  its  own’.  This  Research  Proposal  also  seeks  to  find  out whether exchange  rates do have a  random walk and attempts  to explore  its determinants  in both  the short run and long run. In particular, it looks at the relationship between exchange rate volatility and macroeconomic  fundamentals  as  well  as  other  factors  such  as  rational  expectations,  economic openness, consumer confidence, political events and asset market variables. Understanding the impact of the determinants of exchange rate would help to promote currency stability and greater certainty for international  trade, which  in  turn,  enable  policy makers  to  pursue  greater  economic  stability.  This research will focus on three currencies: UK Pound, US Dollar and the Euro.

Proposed chapter structure

Abstract
•  Provide some general ideas about the research topic and a summary of the key findings
Introduction
•  Present  the  reasons  behind  and  the motivations  of  the  research  project,  i.e.  to  provide  higher
certainty for international trade and pursue greater economic stability.
•  A summary of the key findings by previous literatures.
•  Make  clear  which  literature  provides  which  variables  that  are  considered  as  determinants  of
exchange rate’s behaviours.
•  The  scope  of  the  research,  i.e.  consider  only  3  types  of  currencies: UK Pound, US Dollar  and
Euro; having UK as the domestic economy from 1970-2008.
The underlying framework
•  Explain  the  economic  theory  of  the  model,  i.e.  exchange  rates  are  said  to  be  determined  by #p#分页标题#e#
macroeconomic fundamentals, purchasing power parity, …
•  Explain  how  the  variables  are  constructed,  e.g.  rational  expectation  is  derived  from  relative
interest rate, how the dummy variables for political events is obtained, …
•  Explain why the framework should be divided into short run and long run model
The short run model
•  Outline economic theory of the short run model
•  Identify key variables
•  Construct model and explain the method
•  Hypothesis testing and conclusions
The long run model
•  Outline economic theory of the long run model
•  Identify key variables
•  Construct model and explain the method
•  Hypothesis testing and conclusions
Summary and conclusion

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