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Dynamic forecasting of monetary exchange rate models: Evidence from cointegration

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  • Jae-Kwang Hwang

Abstract

The Frenkel-Bilson and Dornbusch-Frankel monetary exchange rate models are used to estimate the out-of-sample forecasting performance for the U.S. dollar/Canadian dollar exchange rate. By using Johansen's multivariate cointegration, up to three cointegrating vectors were found between the exchange rate and macroeconomic fundamentals. This means that there is a long-run relationship between the exchange rate and economic fundamentals. Based on error correction models, two monetary models outperform the random walk model at the three-, six-, and 12-month forecasting horizons. Therefore, monetary exchange rate models are still useful in forecasting exchange rates. Copyright International Atlantic Economic Society 2001

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  • Jae-Kwang Hwang, 2001. "Dynamic forecasting of monetary exchange rate models: Evidence from cointegration," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 7(1), pages 51-64, February.
    • Handle: RePEc:kap:iaecre:v:7:y:2001:i:1:p:51-64:10.1007/bf02296591
    DOI: 10.1007/BF02296591
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    5. Hoda SELIM, 2010. "Has Egypt's Monetary Policy Changed after the Float?," EcoMod2010 259600152, EcoMod.
    6. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    7. Lee Chin & Muzafar Shah Habibullah & M. Azali, 2009. "Tests of different monetary aggregates for the monetary models of the exchange rate in five ASEAN countries," Applied Economics, Taylor & Francis Journals, vol. 41(14), pages 1771-1783.
    8. Evans, Olaniyi, 2013. "The Monetary Model of Exchange Rate in Nigeria: an Autoregressive Distributed Lag (ARDL) Approach," MPRA Paper 52457, University Library of Munich, Germany.
    9. Hafsa Hina & Abdul Qayyum, 2015. "Re-estimation of Keynesian Model by Considering Critical Events and Multiple Cointegrating Vectors," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 54(2), pages 123-145.
    10. Works, Richard & Haan, Perry, 2017. "An Empirical Study of Japanese and South Korean Exchange Rates Using the Sticky-Price Monetary Theory," MPRA Paper 77235, University Library of Munich, Germany.
    11. Fat Codruta Maria & Dezsi Eva, 2011. "Exchange-Rates Forecasting: Exponential Smoothing Techniques And Arima Models," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 499-508, July.
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    15. Imad Moosa & Kelly Burns, 2014. "Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting," Applied Economics, Taylor & Francis Journals, vol. 46(25), pages 3107-3118, September.
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