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Is there an empirical link between the dollar price of the euro and the monetary fundamentals?

  • Costas Karfakis

This paper examines the empirical link between the dollar exchange rate of the euro and the monetary fundamentals. The exchange rate is found to be cointegrated with money and income differentials, while the homogeneity restrictions are supported by the data. The weak form restrictions of the present-value model of the foreign exchange market are not rejected by the data, but the most stringent restrictions are strongly rejected. An estimated error-correction model explains a substantial part of the short-run exchange rate volatility and outperforms the random walk forecasts.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100600638969
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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 16 (2006)
Issue (Month): 13 ()
Pages: 973-980

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Handle: RePEc:taf:apfiec:v:16:y:2006:i:13:p:973-980
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  1. Ronald MacDonald & Mark P. Taylor, 1992. "The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting," IMF Working Papers 92/34, International Monetary Fund.
  2. Domenico Sartore & Lucia Trevisan & Michele Trova & Francesca Volo, 2002. "US dollar/Euro exchange rate: a monthly econometric model for forecasting," The European Journal of Finance, Taylor & Francis Journals, vol. 8(4), pages 480-501.
  3. Crespo-Cuaresma, Jesús & Fidrmuc, Jarko & McDonald, Ronald, 2003. "The monetary approach to exchange rates in the CEECs," BOFIT Discussion Papers 14/2003, Bank of Finland, Institute for Economies in Transition.
  4. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  5. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  6. Christopher J. Neely & Lucio Sarno, 2002. "How well do monetary fundamentals forecast exchange rates?," Working Papers 2002-007, Federal Reserve Bank of St. Louis.
  7. Robin Brooks & Torsten Sløk & Manmohan S. Kumar & Hali J. Edison, 2001. "Exchange Rates and Capital Flows," IMF Working Papers 01/190, International Monetary Fund.
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