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Is there an empirical link between the dollar price of the euro and the monetary fundamentals?

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Author Info
Costas Karfakis

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Abstract

This paper examines the empirical link between the dollar exchange rate of the euro and the monetary fundamentals. The exchange rate is found to be cointegrated with money and income differentials, while the homogeneity restrictions are supported by the data. The weak form restrictions of the present-value model of the foreign exchange market are not rejected by the data, but the most stringent restrictions are strongly rejected. An estimated error-correction model explains a substantial part of the short-run exchange rate volatility and outperforms the random walk forecasts.

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

Volume (Year): 16 (2006)
Issue (Month): 13 (September)
Pages: 973-980
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Handle: RePEc:taf:apfiec:v:16:y:2006:i:13:p:973-980

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hali J. Edison & Robin Brooks & Manmohan S. Kumar & Torsten Sløk, 2001. "Exchange Rates and Capital Flows," IMF Working Papers 01/190, International Monetary Fund.
  2. Christopher J. Neely & Lucio Sarno, 2002. "How well do monetary fundamentals forecast exchange rates?," Working Papers 2002-007, Federal Reserve Bank of St. Louis. [Downloadable!]
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  3. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
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  4. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
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  5. Domenico Sartore & Lucia Trevisan & Michele Trova & Francesca Volo, 2002. "US dollar/Euro exchange rate: a monthly econometric model for forecasting," European Journal of Finance, Taylor and Francis Journals, vol. 8(4), pages 480-501, December. [Downloadable!] (restricted)
  6. Mark P. Taylor & Ronald MacDonald, 1992. "The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting," IMF Working Papers 92/34, International Monetary Fund.
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Cited by:
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  1. Costas Karfakis, 2008. "What Determines the Forward Exchange Rate of the Euro?," Discussion Paper Series 2008_02, Department of Economics, University of Macedonia, revised Feb 2008. [Downloadable!]
  2. Costas Karfakis, 2008. "Does the US international debt affect the euro/dollar exchange rate?," Discussion Paper Series 2008_06, Department of Economics, University of Macedonia, revised Sep 2008. [Downloadable!]
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