Granger Causality from Exchange Rates to Fundamentals: What Does the Bootstrap Test Show Us?

We use a residual-based bootstrap method to re-examine the finding of the Granger causality relationship from exchange rates to fundamentals in Engel and West (Exchange rate and fundamentals, Journal of Political Economy 2005, 113 (3), 485–517), in which the evidence for the relation is taken as evidence for the present-value model for exchange rates. The test results are against the previous findings. The Monte Carlo experiment results suggest that the causality test implemented in the previous study tends to spuriously reject null hypotheses. Thus, the existing evidence for the present value model for exchange rates is not robust.