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Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff

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  • David Backus

Abstract

Various popular exchange rate models (a standard monetary model, a portfolio balance model, and sticky-price models) are estimated and evaluated using U.S.-Canadian data for the 1970s. Nonnested hypothesis tests demonstrate that none are correctly specified. The data suggest: 1) the exchange rate persistence observed is not fully explained by any of the models; 2) the small Durbin-Watson statistics indicate longer lags are required; 3) the current account is a useful explanatory variable; 4) the portfolio balance model fits the data well, but has potentially serious problems measuring the stock of foreign assets.
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Suggested Citation

  • David Backus, 1984. "Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff," Canadian Journal of Economics, Canadian Economics Association, vol. 17(4), pages 824-846, November.
  • Handle: RePEc:cje:issued:v:17:y:1984:i:4:p:824-46
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    1. Halpern, Paul J. & Mathewson, G. Frank, 1975. "Economies of scale in financial institutions : A general model applied to insurance," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 203-220, April.
    2. Bernstein, Jeffrey I, 1992. " Information Spillovers, Margins, Scale and Scope: With an Application to Canadian Life Insurance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(0), pages 95-105, Supplemen.
    3. Diewert, W E, 1992. "The Measurement of Productivity," Bulletin of Economic Research, Wiley Blackwell, vol. 44(3), pages 163-198, July.
    4. David B. Humphrey, 1991. "Productivity in banking and effects from deregulation," Economic Review, Federal Reserve Bank of Richmond, issue Mar, pages 16-28.
    5. Daly, Michael J. & Someshwar Rao, P. & Geehan, Randall, 1985. "Productivity, scale economies and technical progress in the Canadian life insurance industry," International Journal of Industrial Organization, Elsevier, vol. 3(3), pages 345-361, September.
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