THE IMPACT OF POLITICAL SHOCKS ON COINTEGRATED EXCHANGE-RATE SERIES

This study applies cointegration tests with time-dependent dummies to assess the impact of the Gulf War on the relationship between the forw ard exchange rate and the spot exchange rate using the British pound a nd the Japanese yen in terms of the US dollar. Cointegration of the sp ot and forward rate series cannot be supported for each of the exchang e rates for a sample period around the Gulf War unless a five-week dum my is introduced starting in the Invasion week. The evidence is consis tent with the existing literature in that it indirectly supports the l ong-run relationship between the spot and forward rates and confirms t hat short-run disruptions could occur and are consistent with the long -run relationship.