This paper extends the real interest differential (RID) model of Frankel (1979) by introducing Markov regime switches for three exchange rates over the years 1973 - 2000. Evidence of a non-linear relationship between exchange rates and underlying fundamentals is provided. One of the regimes...

A well known characteristic of flexible exchange rates is their volatility, with result that their movement can be closely approximated by a random walk. One of the attractions of the monetary model of the exchange rate is its ability to offer an explanation of this volatility. A major drawback...