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The monetary model strikes back: Evidence from the world

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  • Cerra, Valerie
  • Saxena, Sweta Chaman

Abstract

We revisit the dramatic failure of monetary models in explaining exchange rate movements. Using the information content from 98 countries, we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals. We also find fundamentals-based models very successful in beating a random walk in out-of-sample prediction.

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Bibliographic Info

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

Volume (Year): 81 (2010)
Issue (Month): 2 (July)
Pages: 184-196

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Handle: RePEc:eee:inecon:v:81:y:2010:i:2:p:184-196

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Monetary models Exchange rates Out-of-sample forecasts Panel data Cointegration;

References

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Citations

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Cited by:
  1. Balke, Nathan S. & Ma, Jun & Wohar, Mark E., 2013. "The contribution of economic fundamentals to movements in exchange rates," Journal of International Economics, Elsevier, vol. 90(1), pages 1-16.
  2. Ince, Onur, 2014. "Forecasting exchange rates out-of-sample with panel methods and real-time data," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 1-18.
  3. Barbara Rossi, 2013. "Exchange Rate Predictability," Working Papers 690, Barcelona Graduate School of Economics.
  4. Christophe Amat & Tomasz Michalski & Gilles Stoltz, 2014. "Forecasting exchange rates better than the random walk thanks to machine learning techniques," Working Papers halshs-01003914, HAL.
  5. Charles Engel, 2013. "Exchange Rates and Interest Parity," NBER Working Papers 19336, National Bureau of Economic Research, Inc.
  6. Chun-Teck Lye & Tze-Haw Chan & Chee-Wooi Hooy, 2011. "Nonlinear prediction of Malaysian exchange rate with monetary fundamentals," Economics Bulletin, AccessEcon, vol. 31(3), pages 1960-1967.
  7. Philippe Bacchetta & Eric van Wincoop & Toni Beutler, 2010. "Can Parameter Instability Explain the Meese-Rogoff Puzzle?," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 125-173 National Bureau of Economic Research, Inc.
  8. Carlos Lenz & Marcel Savioz, 2009. "Monetary determinants of the Swiss franc," Working Papers 2009-16, Swiss National Bank.

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