The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting
Summary:
We re-examine the monetary approach to the exchange rate from a number of perspectives, using monthly data on the deutschemark-dollar exchange rate. Using the Campbell-Shiller technique for testing present value models, we reject the restrictions imposed upon the data by the forward-looking rational expectations monetary model. We demonstrate, however, that the monetary model is validated as a long-run equilibrium condition. Moreover, imposing the long-run monetary model restrictions in a dynamic error correction framework leads to exchange rate forecasts which are superior to those generated by a random walk forecasting model.
Series:
Working Paper No. 1992/034
Subject:
Econometric analysis Exchange rate assessments Exchange rate modelling Exchange rates Foreign exchange National accounts Personal income Vector autoregression
Notes:
Also published in Staff Papers, Vol. 40, No. 1, March 1993.
English
Publication Date:
May 1, 1992
ISBN/ISSN:
9781451978803/1018-5941
Stock No:
WPIEA0341992
Pages:
28
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