Exchange Rate Cointegration Across Central Bank Regime Shifts

Abstract

Foreign exchange rates are examined using cointegration tests over various time periods linked to regime shifts in central bank behavior. The number of cointegrating vectors appears to vary across these regime changes within the foreign exchange market. For example, cointegration is not generally found prior to the Plaza Agreement of September 22, 1985, but it is present after that date. The significance of these changes is evaluated using a likelihood ratio procedure proposed by Quintos (1994). The changing nature of the cointegrating relationships indicate that certain aspects of central bank activity do have long-term effects on exchange rates.

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