The Monetary Model of Exchange Rates and Cointegration: Estimation, Testing and Prediction

by Javier Gardeazabal, Marta Regulez

Overview

These notes draw from the Theory of Cointegration in order to test the monetary model of exchange rate determination.
Previous evidence shows that the monetary model does not capture the short run dynamics of the exchange rate,
specially when assessed in terms of forecasting accuracy.
Even though the monetary equations of exchange rate determination may be bad indicators of how exchange rates are determined in the short run, they couldstill describe long run equilibrium relationships between the exchange rate and its fundamentals. Stationary deviations from those long run relationships are allowed in the short run. This book also addresses severalissues on Cointegration. Chapter 6
studies the small sample distribution of the likelihood ratio test statistics (on the dimension and restrictions on the cointegrating space) under deviations from normality.
This monograph also focuses on the issue of optimal prediction in partially nonstationary multivariate time series models. In particular, it caries out an exchange rate prediction exercise.

Product Details

ISBN-13:	9783540556350
Publisher:	Springer Berlin Heidelberg
Publication date:	08/26/1992
Series:	Lecture Notes in Economics and Mathematical Systems , #385
Edition description:	Softcover reprint of the original 1st ed. 1992
Pages:	194
Product dimensions:	6.69(w) x 9.61(h) x 0.02(d)

Table of Contents

1. Introduction.- 2. The Monetary Model of Exchange Rate Determination.- I. Introduction.- II. Monetary Models.- III. The Asset Market View.- IV. Empirical Evidence.- V. Treatment of Nonstationary Variables.- 3. Long Run Exchange Rate Determination I.- I. Introduction.- II. Some Preliminary Definitions and Engle and Granger Procedure.- III. Interpretation of Previous Results in terms of Cointegration.- IV. Testing for Cointegration Using Engle and Granger Methodology.- V. Empirical Results.- VI. Conclusions.- Appendix A.- 4. Long Run Exchange Rate Determination II.- I. Introduction.- II. Description of The Time Series Model.- III. The Data And Diagnostic Tests.- IV. Estimation And Testing For Cointegration.- V. Tests of Several Hypotheses.- VI. Conclusions.- Appendix A.- Appendix B.- 5. Short Run Exchange Rate Determination.- I. Introduction.- II. Weak Exogeneity of the Exchange Rate.- III. Testing for Weak Exogeneity.- IV. The Asset Market View Derived from an Error Correction Model.- V. Conclusions.- Appendix A.- 6. Effect of Non-Normal Disturbances on Likelihood Ratio Tests.- I. Introduction.- II. The Data Generating Process.- III. Hypotheses Tests.- IV. The Simulation Exercise.- V. Conclusions.- Appendix A: Size of the Tests.- Appendix B: Power of the Tests.- 7. Estimation of the Time Series Model.- I. Introduction.- II. Two Different Interpretations of the Time Series Model.- III. Estimation of the Model.- 8. Prediction in Cointegrated Systems.- I. Introduction.- II. Properties of the True Forecasts from a Cointegrated System.- III. Estimated Forecasts from a Cointegrated System.- 9. Nominal Exchange Rate Prediction.- I. Introduction.- II. Review of Literature.- III. Forecasting Exercise.- IV. Conclusions.- Appendix A.- 10. A Simulation Exercise.- I. Introduction.-II. The Data Generating Process.- III. Results.- Appendix A.- 11. Conclusions.- Data Appendix.