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The Monetary Approach to the Exchange Rate

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Author Info

  • Ronald MacDonald
  • Mark P. Taylor

Abstract

We re-examine the monetary approach to the exchange rate from a number of perspectives, using monthly data on the deutschemark-dollar exchange rate. Using the Campbell-Shiller technique for testing present value models, we reject the restrictions imposed upon the data by the forward-looking rational expectations monetary model. We demonstrate, however, that the monetary model is validated as a long-run equilibrium condition. Moreover, imposing the long-run monetary model restrictions in a dynamic error correction framework leads to exchange rate forecasts which are superior to those generated by a random walk forecasting model.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/34.

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Length: 28
Date of creation: 01 May 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/34

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Postal: International Monetary Fund, Washington, DC USA
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Related research

Keywords: Exchange rates; Economic models; exchange rate; monetary model; monetary approach; monetary fund; dollar exchange rate; foreign exchange market; foreign exchange; money supply; money demand; monetary economics; monetary models; purchasing power parity; exchange rate literature; exchange rate flexibility; monetary policy; exchange rate stability; home currency; purchasing power; spot exchange rate; monetary aggregates; exchange rate economics; money market; exchange rate determination; ppp; exchange rate forecasting; exchange rate change; demand for money; domestic money supply; exchange markets;

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Citations

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Cited by:
  1. Hans-Werner Sinn & Frank Westermann, 2001. "Why Has the Euro Been Falling? An Investigation into the Determinants of the Exchange Rate," NBER Working Papers 8352, National Bureau of Economic Research, Inc.
  2. Kumah, F.Y., 1996. "The Effect of Monetary Policy on Exchange Rates: How to Solve the Puzzles," Discussion Paper 1996-70, Tilburg University, Center for Economic Research.
  3. Philippe Bacchetta & Eric van Wincoop, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," Working Papers 03.02, Swiss National Bank, Study Center Gerzensee.
  4. Charles Engel & Kenneth D. West, 2004. "Exchange Rates and Fundamentals," NBER Working Papers 10723, National Bureau of Economic Research, Inc.
  5. Costas Karfakis, 2006. "Is there an empirical link between the dollar price of the euro and the monetary fundamentals?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 973-980.
  6. Ronald Macdonald, 1999. "Asset Market and Balance of Payments Characteristics: An Eclectic Exchange Rate Model for the Dollar, Mark and Yen," Open Economies Review, Springer, vol. 10(1), pages 5-29, February.
  7. Andreas Breitenfellner & Jesus Crespo Cuaresma, 2008. "Crude Oil Prices and the USD/EUR Exchange Rate," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4.
  8. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February.
  9. Hans-Werner Sinn & Frank Westermann, 2001. "Why Has the Euro Been Falling?," CESifo Working Paper Series 493, CESifo Group Munich.
  10. Yin-Wong Cheung & Menzie D. Chinn, 2000. "Currency Traders and Exchange Rate Dynamics: A Survey of the U.S. Market," CESifo Working Paper Series 251, CESifo Group Munich.
  11. Ana Luísa Gouvêa Abras & Rodrigo Marino Sekkel, 2003. "Choques Nominais e Reais na Taxa de Câmbio: Evidência Empírica para o Brasil Pós Desvalorização de 1999," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] c48, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  12. Jan J.J. Groen, 1998. "The Monetary Exchange Rate Model as a Long-Run Phenomenon," Tinbergen Institute Discussion Papers 98-082/2, Tinbergen Institute.
  13. J.J.J. Groen, 2001. "(EURO) Exchange Rate Predictability and Monetary Fundamentals in a Small Multi-Country Panel," WO Research Memoranda (discontinued) 664, Netherlands Central Bank, Research Department.

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