Abstract

Theoretically, changes in macroeconomic fundamentals are reflected in the fluctuations of exchange rates. However, the relationship between these two variables was not clearly demonstrated when using the Taiwan-U.S. bilateral exchange rate as an example. Therefore, this study researches the cointegration relationship between exchange rate and fundamental variables from the angle of the multilateral exchange rate. The researchers use this process to verify the empirical reliability of applying the exchange rate model to a small open economy such as Taiwan. This study also uses the Granger causality test to strengthen the argument of this study. The results showed that the multilateral exchange rate could provide more comprehensive information and enhance the explanatory power of the traditional exchange rate model when applied to empirical research. The multilateral exchange rate can also assist researchers in interpreting the interdependent relationships between Taiwan and its major trade rivals.

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