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"Dumb And Dumber" Explanations For Exchange Rate Dynamics

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Author Info
S. Brock Blomberg () (Wellesley College and Harvard University)

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Abstract

The failure of the structural monetary model to beat a random walk in out-of-sample forecasting is one of the most celebrated empirical (non) findings in international finance. In this paper we show that this result is an artifact of the way monetary policy is measured. We construct a simple measure of monetary policy based on the narrative approach of Romer & Romer (1989). Using a linear Gaussian autoregressive specification with exogenous variables (ARX), we demonstrate that a structural monetary model with properly measured money does indeed outperform the random walk in out-of-sample forecasts over a wide range of horizons. We conclude that contrary to the conventional wisdom, money (appropriately defined) is a robust fundamental determinant of short-run exchange rate dynamics.

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Publisher Info
Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): IV (2001)
Issue (Month): (November)
Pages: 187-216
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Handle: RePEc:cem:jaecon:v:4:y:2001:n:2:p:187-216

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Related research
Keywords: exchange rates; asset prices; monetary policy;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

References listed on IDEAS
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    Other versions:
  5. Leeper, Eric M., 1997. "Narrative and VAR approaches to monetary policy: Common identification problems," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 641-657, December. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
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    Other versions:
  15. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John C. Bluedorn & Christopher Bowdler, 2005. "Monetary Policy and Exchange Rate Dynamics: New Evidence from the Narrative Approach to Shock Identification," Economics Papers 2005-W18, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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