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A Theory-Consistent CVAR Scenario for a Monetary Model with Forward-Looking Expectations

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  • Katarina Juselius

    (Department of Economics, University of Copenhagen, Øster Farimasgade 5, 1355 Copenhagen, Denmark)

Abstract

A theory-consistent CVAR scenario describes a set of testable regularities capturing basic assumptions of the theoretical model. Using this concept, the paper considers a standard model for exchange rate determination with forward-looking expectations and shows that all assumptions about the model’s shock structure and steady-state behavior can be formulated as testable hypotheses on common stochastic trends and cointegration. The basic stationarity assumptions of the monetary model failed to obtain empirical support. They were too restrictive to explain the observed long persistent swings in the real exchange rate, the real interest rates, and the inflation and interest rate differentials.

Suggested Citation

  • Katarina Juselius, 2022. "A Theory-Consistent CVAR Scenario for a Monetary Model with Forward-Looking Expectations," Econometrics, MDPI, vol. 10(2), pages 1-15, April.
    • Handle: RePEc:gam:jecnmx:v:10:y:2022:i:2:p:16-:d:787961
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