Cross-Section Dependence and the Monetary Exchange Rate Model: A Panel Analysis
This paper tackles the issue of cross-section dependence for the monetary exchange rate model in the presence of unobserved common factors using panel data from 1973 until 2007 for 19 OECD countries. Applying a principal component analysis we distinguish between common factors and idiosyncratic components and determine whether non-stationarity stems from international or national stochastic trends. We find evidence for a cross-section cointegration relationship between the exchange rates and fundamentals which is driven by those common international trends. In addition, the estimated coefficients of income and money are in line with the suggestions of the monetary model.
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- Frömmel, Michael & MacDonald, Ronald & Menkhoff, Lukas, 2003.
"Do Fundamentals Matter for the D-Mark/Euro-Dollar? A Regime Switching Approach,"
Hannover Economic Papers (HEP)
dp-289, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- Frommel, Michael & MacDonald, Ronald & Menkhoff, Lukas, 2005. "Do fundamentals matter for the D-Mark/Euro-Dollar? A regime switching approach," Global Finance Journal, Elsevier, vol. 15(3), pages 321-335, February.
- Frommel, Michael & MacDonald, Ronald & Menkhoff, Lukas, 2005.
"Markov switching regimes in a monetary exchange rate model,"
Elsevier, vol. 22(3), pages 485-502, May.
- Michael Froemmel & Ronald Macdonald & Lukas Menkhoff, 2004. "Markov Switching Regimes In A Monetary Exchange Rate Model," Royal Economic Society Annual Conference 2004 119, Royal Economic Society.
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