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The Monetary Model Strikes Back

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  • Valerie Cerra
  • Sweta Chaman Saxena

Abstract

We revisit the dramatic failure of monetary models in explaining exchange rate movements. Using the information content from 98 countries, we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals. We also find fundamentalsbased models very successful in beating a random walk in out-of-sample prediction.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/73.

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Length: 41
Date of creation: 01 Mar 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/73

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Keywords: Exchange rates; Forecasting models; random walk; inflation; monetary model; cointegration; statistics; forecasting; statistic; bootstrap; monetary models; correlation; money supplies; equation; econometrics; estimation period; equations; time series; samples; money supply; predictions; prediction; standard errors; significance levels; finite sample; predictability; statistical significance; adjustment parameter; financial statistics; dummy variable; explanatory power; covariance; monetary approach; sample size; monetary fund; monetary exchange; coefficient of adjustment; monetary analysis; monetary statistics; significance level; outlier; combination of variables; calibrations; hypothesis testing; survey; autocorrelation; instrumental variable; time series analysis; statistical inference; demand for money; statistical model; central bank; covariances; pooled time series; standard deviation;

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Cited by:
  1. Philippe Bacchetta & Eric van Wincoop & Toni Beutler, 2009. "Can Parameter Instability Explain the Meese-Rogoff Puzzle?," Working Papers 09.04, Swiss National Bank, Study Center Gerzensee.
  2. Daniel Andrés Jaimes Cárdenas & Jair Ojeda Joya, . "Reglas de Taylor y previsibilidad fuera de muestra de la tasa de cambio en Latinoamérica," Borradores de Economia 619, Banco de la Republica de Colombia.
  3. Chun-Teck Lye & Tze-Haw Chan & Chee-Wooi Hooy, 2011. "Nonlinear prediction of Malaysian exchange rate with monetary fundamentals," Economics Bulletin, AccessEcon, vol. 31(3), pages 1960-1967.
  4. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc.

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