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The Monetary Model of the Dollar-Yen Exchange Rate Determination: A Cointegration Approach

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Author Info

  • M. Faizul Islam

    (Department of Management Studies, Southeastern University, U.S.A.)

  • Mohammad S. Hasan

    (Faculty of Organisation and Management, Sheffield Hallam University, U.K.)

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    Abstract

    This paper validates the monetary model in the determination of the dollar-yen exchange rate by applying cointegration methodology. Estimation results indicate a stationary relationship between the dollar-yen exchange rate and monetary models, with long-term causality flowing from monetary variables to the dollar-yen exchange rate. The forecasting performance of the monetary model based on the error-correction model outperforms random walk models.

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    Bibliographic Info

    Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

    Volume (Year): 5 (2006)
    Issue (Month): 2 (August)
    Pages: 129-145

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    Handle: RePEc:ijb:journl:v:5:y:2006:i:2:p:129-145

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    Related research

    Keywords: cointegration; error-correction model; exchange rate; monetary model; random walk model;

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    References

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    1. Paruolo, Paolo, 1996. "On the determination of integration indices in I(2) systems," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 313-356.
    2. Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
    3. Panayiotis Diamantis & Dimitris Georgoutsos & George Kouretas, . "The Monetary Approach To The Exchange Rate: Long-Run Relationships, Identification And Temporal Stability," Working Papers 9507, University of Crete, Department of Economics.
    4. Boothe, Paul & Glassman, Debra, 1987. "Off the Mark: Lessons for Exchange Rate Modelling," Oxford Economic Papers, Oxford University Press, vol. 39(3), pages 443-57, September.
    5. MacDonald, Ronald & Taylor, Mark P., 1994. "The monetary model of the exchange rate: long-run relationships, short-run dynamics and how to beat a random walk," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 276-290, June.
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    Cited by:
    1. Khan, Muhammad Arshad & Qayyum, Abdul, 2007. "Exchange Rate Determination In Pakistan: Evidence Based On Purchasing Power Parity Theory," MPRA Paper 6754, University Library of Munich, Germany.

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