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(EURO) Exchange Rate Predictability and Monetary Fundamentals in a Small Multi-Country Panel

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  • J.J.J. Groen

Abstract

In this paper a panel of vector error correction models based on a common long-run relationship is utilized to test whether the DM exchange rates of Canada, Japan and the United States comply in the long-run with a rational expectations-based monetary exchange rate model. Compared to existing coin-tegration frameworks our approach indicates that the aforementioned exchange rates are indeed consis-tent with the monetary exchange rate model based on a common long-run relationship. We also analyze the out-of-sample fit of this common long-run exchange rate model relative to naive random walk-based forecasts through several forecasting evaluation measures. These forecasting evaluations indicate that the monetary model-based common long-run model is superior to both random walk-based forecasts and standard cointegrated VAR model-based forecasts.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 664.

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Date of creation: 2001
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Handle: RePEc:dnb:wormem:664

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Related research

Keywords: Panel cointegration testing; nominal exchange rates; exchange rate predictability.;

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References

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  1. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  2. Peter F. Christoffersen & Francis X. Diebold, 1997. "Cointegration and long-horizon forecasting," Working Papers 97-14, Federal Reserve Bank of Philadelphia.
  3. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  4. Jan J.J. Groen, 1998. "The Monetary Exchange Rate Model as a Long-Run Phenomenon," Tinbergen Institute Discussion Papers 98-082/2, Tinbergen Institute.
  5. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  6. Otero, Jesus & Smith, Jeremy, 2000. "Testing for cointegration: power versus frequency of observation -- further Monte Carlo results," Economics Letters, Elsevier, vol. 67(1), pages 5-9, April.
  7. Ronald MacDonald & Mark P. Taylor, 1992. "The Monetary Approach to the Exchange Rate," IMF Working Papers 92/34, International Monetary Fund.
  8. Jan J.J. Groen & Frank R. Kleibergen, 1999. "Likelihood-Based Cointegration Analysis in Panels of Vector Error Correction Models," Tinbergen Institute Discussion Papers 99-055/4, Tinbergen Institute.
  9. Nicholas Sarantis, 1994. "The monetary exchange rate model in the long run: An empirical investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 130(4), pages 698-711, December.
  10. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, vol. 85(1), pages 201-18, March.
  11. Jeremy Berkowitz & Lorenzo Giorgianni, 1996. "Long-horizon exchange rate predictability?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 96-39, Board of Governors of the Federal Reserve System (U.S.).
  12. repec:cup:cbooks:9780521783248 is not listed on IDEAS
  13. Arnold, Ivo J. M. & de Vries, Casper G., 2000. "Endogeneity in European money demand," European Journal of Political Economy, Elsevier, vol. 16(4), pages 587-609, November.
  14. Jan J. J. Groen, 1999. "Long horizon predictability of exchange rates: Is it for real?," Empirical Economics, Springer, Springer, vol. 24(3), pages 451-469.
  15. 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.
  16. Groen, Jan J J, 2002. " Cointegration and the Monetary Exchange Rate Model Revisited," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(4), pages 361-80, September.
  17. Kirstin Hubrich & Peter Vlaar, 2004. "Monetary transmission in Germany: Lessons for the Euro area," Empirical Economics, Springer, Springer, vol. 29(2), pages 383-414, 05.
  18. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
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Citations

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Cited by:
  1. Galimberti, Jaqueson K. & Moura, Marcelo L., 2013. "Taylor rules and exchange rate predictability in emerging economies," Journal of International Money and Finance, Elsevier, Elsevier, vol. 32(C), pages 1008-1031.
  2. Philippe Bacchetta & Eric van Wincoop & Toni Beutler, 2010. "Can Parameter Instability Explain the Meese-Rogoff Puzzle?," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 125-173 National Bureau of Economic Research, Inc.
  3. Loría, Eduardo & Sánchez, Armando & Salgado, Uberto, 2010. "New evidence on the monetary approach of exchange rate determination in Mexico 1994-2007: A cointegrated SVAR model," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(3), pages 540-554, April.
  4. Jeffery D. Amato & Andrew Filardo & Gabriele Galati & Goetz von Peter & Feng Zhu, 2005. "Research on exchange rates and monetary policy: an overview," BIS Working Papers 178, Bank for International Settlements.
  5. Menzie D. Chinn, 2010. "Comment on "Can Parameter Instability Explain the Meese-Rogoff Puzzle?"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 174-179 National Bureau of Economic Research, Inc.

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