Exchange rate dynamics in the presence of structural breaks: an application to the yen/dollar case.

Summary While many empirical exercises show that the dynamics of flexible exchange rates are the result of purely speculative phenomena, this thesis highlights, on the contrary, that these fluctuations are not decoupled from any macroeconomic determinant. These results are established on the basis of an econometric study of the case of the monthly real exchange rate of the yen/dollar. Our approach emphasizes the interaction between financial and macroeconomic variables in the determination of currency exchange rates, with reference to international portfolio choice theory. In addition, we focus on the study of persistent linkages between exchange rates and their fundamentals-which we characterize as cointegrating relationships-and the influence of these linkages on the short-term dynamics of these variables. An essential contribution of this thesis lies in taking into account, both in economic modeling and in statistical measurement, the influence of structural breaks, i.e. unpredictable shocks that durably affect the structure of the economy studied, in a system of non-stationary series. In particular, we show that the uncertainty on the parameters of the true model that agents face after a regime change leads to systematic forecast errors on their part during a learning period. Finally, we develop an econometric tool that allows us to characterize the long-run properties of a multivariate cointegrated dynamic system in the presence of such breaks.