Currency spillovers and tri-polarity: a simultaneous model of the US dollar, German mark and Japanese yen

摘要

This paper presents a simultaneous model of exchange rates between the US dollar, German mark and Japanese yen. In addition to incorporating long-run equilibria and short-run dynamics, the model is designed to capture complex interaction between currencies not normally considered in exchange rate models. The model is demonstrated to be an economically and statistically superior forecasting tool over relatively short horizons, thereby demonstrating that the random walk paradigm no longer rules the roost.