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The monetary exchange rate model as a long-run phenomenon

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  • Groen, Jan J. J.

Abstract

Pure time series-based tests fail to find empirical support for monetary exchange rate models. In this paper we apply pooled time series estimation on a forward-looking monetary model, resulting in parameter estimates which are in compliance with the underlying theory. Based on a panel version of the Engle and Granger (1987) two-step procedure we find that the residuals of our pooled estimated model are stationary. This indicates that on a pooled time series level there is cointegration between the exchange rate and the macroeconomic fundamentals of this monetary model.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 52 (2000)
Issue (Month): 2 (December)
Pages: 299-319
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Handle: RePEc:eee:inecon:v:52:y:2000:i:2:p:299-319

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  1. O'Connell, Paul G. J., 1998. "The overvaluation of purchasing power parity," Journal of International Economics, Elsevier, vol. 44(1), pages 1-19, February.
  2. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
  3. Nicholas Sarantis, 1994. "The monetary exchange rate model in the long run: An empirical investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(4), pages 698-711, December.
  4. Craig S. Hakkio & Mark Rush, 1990. "Cointegration: how short is the long run?," Research Working Paper 90-08, Federal Reserve Bank of Kansas City.
  5. Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
  6. Pierre Perron & Robert J. Shiller, 1984. "Testing the Random Walk Hypothesis: Power Versus Frequency of Observation," Cowles Foundation Discussion Papers 732, Cowles Foundation for Research in Economics, Yale University.
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  8. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March.
  9. Oh, Keun-Yeob, 1996. "Purchasing power parity and unit root tests using panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 405-418, June.
  10. Koedijk, C.G. & Schotman, P., 1990. "How to beat the random walk: An empirical model of real exchange rates," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3108720, Tilburg University.
  11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  12. Koedijk, Kees G. & Schotman, Peter, 1990. "How to beat the random walk : An empirical model of real exchange rates," Journal of International Economics, Elsevier, vol. 29(3-4), pages 311-332, November.
  13. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November.
  14. Mark P. Taylor & Ronald MacDonald, 1992. "The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting," IMF Working Papers 92/34, International Monetary Fund.
  15. Ghysels, Eric, 1990. "Unit-Root Tests and the Statistical Pitfalls of Seasonal Adjustment: The Case of U.S. Postwar Real Gross National Product," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 145-52, April.
  16. Hakkio, Craig S., 1984. "A re-examination of purchasing power parity : A multi-country and multi-period study," Journal of International Economics, Elsevier, vol. 17(3-4), pages 265-277, November.
  17. Koedijk, C.G. & Schotman, P., 1990. "How to beat the random walk: an empirical model of real exchange rates," Open Access publications from Maastricht University urn:nbn:nl:ui:27-5932, Maastricht University.
  18. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  19. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December.
  20. Jeffrey A. Frankel, 1984. "Tests of Monetary and Portfolio Balance Models of Exchange Rate Determination," NBER Chapters, in: Exchange Rate Theory and Practice, pages 239-260 National Bureau of Economic Research, Inc.
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