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The Monetary Approach to the Exchange Rate: Some Empirical Evidence (La théorie monétaire du taux de change: preuves empiriques) (El enfoque monetario del tipo de cambio: Algunas pruebas empíricas)

Author

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  • John F. O. Bilson

    (International Monetary Fund)

Abstract

This paper examines the empirical validity of a simple monetary model of exchange rate determination. The model stresses that the exchange rate, which is the relative price of two monies, is determined by the relative supplies of, and demands for, the two monies, rather than by the condition for flow equilibrium in the balance of payments. It follows from this approach that the exchange rate is determined by the relative money supplies, the levels of real income, and the nominal interest rates in the two countries under consideration. The monetary model provides a useful tool for exchange rate analysis because it (a) clearly defines the role of speculation among the determinants of the exchange rate; (b) provides a workable definition of the equilibrium exchange rate; and (c) directly relates the equilibrium rate to the underlying instruments of monetary policy. The model is tested using data on the deutsche mark/pound rate during the current floating rate period. This particular rate was chosen because of the large variance in the variable stressed by the monetary approach. The empirical tests broadly support this approach, although the need for a more complete empirical model is evident. /// Cette étude examine la validité empirique d'un modèle monétaire simple de la détermination du taux de change. Ce modèle fait ressortir que le taux de change, qui est le prix relatif de deux monnaies, est déterminé par l'offre et la demande relatives des deux monnaies, plus que par la condition d'équilibre des flux dans la balance des paiements. Il découle de cette théorie que le taux de change est déterminé par l'offre de monnaie relative, le niveau du revenu réel et le taux d'intérêt nominal dans chacun des deux pays considérés. Le modèle monétaire constitue un instrument utile pour l'analyse des taux de change en ce qu'il a) définit clairement le rôle de la spéculation parmi les facteurs qui déterminent le taux de change, b) donne une définition exploitable du taux de change d'équilibre, enfin c) établit une relation directe entre le taux d'équilibre et les instruments de politique monétaire sous-jacents. L'auteur teste le modèle pour les données sur le cours du deutsche mark par rapport à la livre pendant la période de flottement actuelle. Ce taux particulier a été choisi en raison de la variance élevée de la variable mise en avant par la théorie monétaire. Les essais empiriques corroborent largement cette théorie; il est néanmoins évident qu'un modèle empirique plus complet est nécessaire. /// En este trabajo se examina la validez empírica de un modelo monetario sencillo de determinación del tipo de cambio. El modelo subraya que el tipo de cambio, que es el precio relativo de dos monedas, está determinado por la oferta y la demanda relativas de ambas, y no por el equilibrio de flujos de la balanza de pagos. De este enfoque se deduce que el tipo de cambio está determinado por las ofertas monetarias relativas, los niveles de ingreso real y los tipos de interés nominales de los dos países analizados. El modelo monetario constituye un instrumento útil para el análisis del tipo de cambio porque: a) define claramente el papel de la especulación entre los determinantes del tipo de cambio; b) proporciona una definición operativa del tipo de cambio de equilibrio, y c) relaciona directamente el tipo de equilibrio con los instrumentos fundamentales de la política monetaria. En la verificación del modelo se utilizan datos sobre el tipo marco alemán/libra esterlina durante el actual período de tipos flotantes. Este tipo se eligió en razón de la amplia varianza de la variable subrayada por el enfoque monetario. Las pruebas empíricas respaldan en general este enfoque, aunque es evidente que se necesita un modelo empírico más completo.

Suggested Citation

  • John F. O. Bilson, 1978. "The Monetary Approach to the Exchange Rate: Some Empirical Evidence (La théorie monétaire du taux de change: preuves empiriques) (El enfoque monetario del tipo de cambio: Algunas pruebas empíricas)," IMF Staff Papers, Palgrave Macmillan, vol. 25(1), pages 48-75, March.
  • Handle: RePEc:pal:imfstp:v:25:y:1978:i:1:p:48-75
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    Cited by:

    1. M. Sumner, 2009. "Demand for money in Thailand," Applied Economics, Taylor & Francis Journals, vol. 41(10), pages 1269-1276.
    2. Moura, Marcelo L. , & Lima, Adauto R. S. & Mendonça, Rodrigo M., 2008. "Exchange Rate and Fundamentals: The Case of Brazil," Insper Working Papers wpe_114, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    3. George Tawadros, 2001. "The predictive power of the monetary model of exchange rate determination," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 279-286.
    4. Francisco Ledesma & Manuel Navarro & Jorge Perez & Simón Sosvilla, 1998. "Purchasing power parity and uncovered interest parity: The Spanish case," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(4), pages 335-348, November.
    5. repec:kap:iaecre:v:4:y:1998:i:4:p:335-348 is not listed on IDEAS
    6. Moura, Marcelo L. & Lima, Adauto R. S., 2007. "Empirical exchange rate models fit: Evidence from the Brazilian economy," Insper Working Papers wpe_87, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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