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...e are those of the authors and do not necessarily represent those of the Banco de la República or those of its Board of Directors. The authors thank Santiago Téllez for his helpful comments and suggestions. The usual disclaimer applies. 2 Department of Economics, University of Melbourne. E-mail: rloaizma@gmail.com 3 Research Unit, Banco de la República (Central Bank of Colombia). E-mail: jgomezgo@banrep.gov.co 4 Econometrics Unit, Banco de la República (Central Bank of Colombia). E-mail: lmelovel@banrep.gov.co 5 See, Kang et al. (2002), Chadwick et al. (2002), Patton (2006), Fernandez (2007), Kuhl (2008), Orlov (2009), and Benediktsdottir and Scotti (2009). 6 See, for instance, Loaiza et al (2014). negative effects caused by external shocks. Particularly, whenever contagion is identified between any two pairs of exchange rates, short-run isolation policies such as capital controls or central bank interventions in foreign currency markets may be effective for isolating a country from a currency crisis originated abroad. However, whenever the transmission of crises is due to permanent channels (no contagion) these policies may be ineffective and costly. Capital controls, for example, may delay ...

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... found evidence of a long-run relationship between exchange rates and fundamentals when more sophisticated econometrics such as panel methods are applied.1 In the context of market efficiency and exchange rates, another strand of literature focuses on the question whether major exchange rates share common stochastic trends or, more precisely, whether co-movements between exchange rates can be identified. Evidence for this kind of relationships has been found both before and after the introduction of the Euro by different authors (see, e.g., Haug, MacKinnon, and Michelis (2000); Kühl (2010)).2 Kühl (2008) shows that not only exchange rates share common stochastic trends but also cointegration between fundamentals across the economies exists. For instance, cointegration across countries might occur if monetary policies are coordinated to limit exchange rate fluctuations such that currency prices cannot permanently diverge from each other (Phengpis and Nguyen, 2009). 1In the time series dimension these econometrics include non-linear approaches such as nonlinear error correction models (see, e.g., Taylor and Peel (2000); Taylor, Peel, and Sarno (2001)) or models with time varying coefficients (s...