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Asset Market and Balance of Payments Characteristics: An Eclectic Exchange Rate Model for the Dollar, Mark and Yen

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  • Ronald Macdonald

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Abstract

In this paper we use an exchange rate model, which combines asset market characteristics with balance of payments interactions, to examine the nominal effective exchange rates of the German mark, Japanese yen and US dollar for the recent experience with floating exchange rates. Our approach may be interpreted as one which attempts to flesh out the missing links that arise in conditioning an exchange rate solely on relative prices, as occurs in a standard PPP analysis. Amongst the results reported in this paper are: significant, and sensible, long-run relationships for the currencies studied; complex short-run dynamics; a variance decomposition analysis which apportions nominal exchange rate error variances into real and nominal elements. Copyright Kluwer Academic Publishers 1999

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 10 (1999)
Issue (Month): 1 (February)
Pages: 5-29

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Handle: RePEc:kap:openec:v:10:y:1999:i:1:p:5-29

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: exchange rates; purchasing power parity; cointegration;

References

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  1. Hamid Faruqee, 1994. "Long-Run Determinants of the Real Exchange Rate," IMF Working Papers 94/90, International Monetary Fund.
  2. Ronald Macdonald, 1995. "Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 437-489, September.
  3. Kugler, Peter & Lenz, Carlos, 1993. "Multivariate Cointegration Analysis and the Long-Run Validity of PPP," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 180-84, February.
  4. Ronald MacDonald, 1995. "Long-Run Exchange Rate Modeling," IMF Working Papers 95/14, International Monetary Fund.
  5. Peter B. Clark & Steven A. Symansky & Tamim Bayoumi & Mark P. Taylor, 1994. "Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies," IMF Working Papers 94/17, International Monetary Fund.
  6. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
  7. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
  8. Stockman, Alan C., 1988. "Real exchange-rate variability under pegged and floating nominal exchange-rate systems: An equilibrium theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 259-294, January.
  9. John Y. Campbell & Robert J. Shiller, 1988. "Interpreting Cointegrated Models," NBER Working Papers 2568, National Bureau of Economic Research, Inc.
  10. Hamid Faruqee, 1995. "Long-Run Determinants of the Real Exchange Rate: A Stock-Flow Perspective," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 80-107, March.
  11. Ronald MacDonald & Mark P. Taylor, 1992. "The Monetary Approach to the Exchange Rate," IMF Working Papers 92/34, International Monetary Fund.
  12. R Macdonald, . "Long Run Purchasing Power Parity: Is It For Real?," Dundee Discussion Papers in Economics 029, Economic Studies, University of Dundee.
  13. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  14. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
  15. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
  16. Michael L. Mussa, 1984. "The Theory of Exchange Rate Determination," NBER Chapters, in: Exchange Rate Theory and Practice, pages 13-78 National Bureau of Economic Research, Inc.
  17. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  18. Ronald Mac Donald, 1998. "What Do We Really Know About Real Exchange Rates?," Working Papers 28, Oesterreichische Nationalbank (Austrian Central Bank).
  19. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February.
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