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Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff

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  • David Backus

Abstract

Various popular exchange rate models (a standard monetary model, a portfolio balance model, and sticky-price models) are estimated and evaluated using U.S.-Canadian data for the 1970s. Nonnested hypothesis tests demonstrate that none are correctly specified. The data suggest: 1) the exchange rate persistence observed is not fully explained by any of the models; 2) the small Durbin-Watson statistics indicate longer lags are required; 3) the current account is a useful explanatory variable; 4) the portfolio balance model fits the data well, but has potentially serious problems measuring the stock of foreign assets.

Suggested Citation

  • David Backus, 1982. "Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff," Working Paper 463, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:463
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