The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting
AbstractWe reexamine the monetary approach to the exchange rate from several perspectives, using monthly data on the deutsche mark-U.S. dollar exchange rate. Using the Campbell-Shiller technique, we reject the restrictions imposed on the data by the forward-looking rational expectations monetary model. The monetary model, however, 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 that are superior to those generated by a random walk forecasting model.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 92/34.
Date of creation: 01 May 1992
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Other versions of this item:
- Ronald Macdonald & Mark P. Taylor, 1993. "The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium, and Forecasting," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 89-107, March.
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
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