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Third country news in the monetary model of the exchange rate

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Author Info
John D. Jackson
Henry Thompson
Juliet Zheng

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Abstract

With third country bonds added to the monetary model of exchange rate news, third country news would have a theoretical effect on exchange rate news. The present paper uncovers empirical evidence of third country (USA) news for a number of exchange rates. Further, insignificant income, interest rate, and inflation variables in the two country model become significant with third country news, suggesting model misspecification. The unexplained variance of exchange rates may not be due to speculative bubbles as supposed, and foreign exchange markets may not be as efficient as they have appeared.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 15 (2005)
Issue (Month): 11 (July)
Pages: 757-764
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Handle: RePEc:taf:apfiec:v:15:y:2005:i:11:p:757-764

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  1. Chinn, Menzie D. & Meese, Richard A., 1995. "Banking on currency forecasts: How predictable is change in money?," Journal of International Economics, Elsevier, vol. 38(1-2), pages 161-178, February. [Downloadable!] (restricted)
  2. Richard Meese & Kenneth Rogoff, 1982. "The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?," International Finance Discussion Papers 204, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Rapach, David E. & Wohar, Mark E., 2002. "Testing the monetary model of exchange rate determination: new evidence from a century of data," Journal of International Economics, Elsevier, vol. 58(2), pages 359-385, December. [Downloadable!] (restricted)
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This page was last updated on 2010-1-1.

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