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Asset Market and Balance of Payments Characteristics; An Eclectic Exchange Rate Model for the Dollar, Mark, and Yen

  • Ronald MacDonald

In this paper we use an exchange rate model that combines asset market characteristics with balance of payments interactions to examine the nominal effective exchange rates of the German mark, Japanese yen, and U.S. dollar for the recent experience with floating exchange rates. Our approach may be interpreted as one which attempts to flesh out the missing links that arise in conditioning an exchange rate solely on relative prices, as occurs in a standard PPP analysis. In contrast to much other empirical exchange rate modeling, our approach explicitly involves the use of a current account sustainability term. Amongst the findings reported in this paper are: significant, and sensible, long-run relationships for all of the currencies studied; appealing short-run dynamics for two of the currencies; and a finding that the Japanese effective exchange rate closely tracks the long-run exchange rate defined in this paper.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 95/55.

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Length: 38
Date of creation: 01 Jun 1995
Date of revision:
Handle: RePEc:imf:imfwpa:95/55
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  1. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  2. Alan C. Stockman, 1988. "Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory," NBER Working Papers 2565, National Bureau of Economic Research, Inc.
  3. MacDonald, Ronald, 1993. "Long-Run Purchasing Power Parity: Is It for Real?," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 690-95, November.
  4. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February.
  5. Michael L. Mussa, 1984. "The Theory of Exchange Rate Determination," NBER Chapters, in: Exchange Rate Theory and Practice, pages 13-78 National Bureau of Economic Research, Inc.
  6. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
  7. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, December.
  8. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  10. Kugler, Peter & Lenz, Carlos, 1993. "Multivariate Cointegration Analysis and the Long-Run Validity of PPP," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 180-84, February.
  11. Ronald Macdonald, 1995. "Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 437-489, September.
  12. 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.
  13. Shiller, Robert & Campbell, John, 1988. "Interpreting Cointegrated Models," Scholarly Articles 3221492, Harvard University Department of Economics.
  14. Peter B. Clark & Steven A. Symansky & Tamim Bayoumi & Mark P. Taylor, 1994. "Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies," IMF Working Papers 94/17, International Monetary Fund.
  15. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
  16. Hamid Faruqee, 1994. "Long-Run Determinants of the Real Exchange Rate; A Stock-Flow Perspective," IMF Working Papers 94/90, International Monetary Fund.
  17. Ronald Mac Donald, 1998. "What Do We Really Know About Real Exchange Rates?," Working Papers 28, Oesterreichische Nationalbank (Austrian Central Bank).
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