TY - JOUR AU - Trabelsi Karoui, Ali AU - Kammoun, Aida PY - 2021/05/14 Y2 - 2024/03/29 TI - Exchange Rate Determination: Mixed Microstructural and Macroeconomic Approach JF - International Journal of Economics and Financial Issues JA - IJEFI VL - 11 IS - 3 SE - Articles DO - UR - https://www.econjournals.com/index.php/ijefi/article/view/11305 SP - 89-106 AB - <p>This paper represents a new approach in the exchange rate determination by using microstructural and macroeconomic variables. We test a combination of fundamentals and microstructure variables in cointegrated relationship of the USD/JPY and USD/GBP currencies' pairs. The ‘twofold' model includes interest rate, money supply and net foreign assets as fundamentals, and spread and high-low spread as a microstructure variable. Then we compare the different models of macroeconomic and twofold model with the random walk using an error-correction method. We find that the twofold model outperforms the random structural model in out-of-sample and in-sample forecast test for both exchange rates. Twofold model outperforms in out-of-sample forecast the random walk test for the USD/JPY. </p><p><strong>Keywords: </strong>exchange rate, spreads, interest rate, money supply, net foreign assets, twofold model, cointegration</p><p><strong>JEL Classifications: </strong>G15, G17, G18, F31, F62</p><p> DOI: <a href="https://doi.org/10.32479/ijefi.11305">https://doi.org/10.32479/ijefi.11305</a></p> ER -