The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting

May 1, 1992

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Format: Chicago

Ronald MacDonald, and Mark P. Taylor The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting, (USA: International Monetary Fund, 1992) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We re-examine the monetary approach to the exchange rate from a number of perspectives, using monthly data on the deutschemark-dollar exchange rate. Using the Campbell-Shiller technique for testing present value models, we reject the restrictions imposed upon the data by the forward-looking rational expectations monetary model. We demonstrate, however, that the monetary model is validated as a long-run equilibrium condition. Moreover, imposing the long-run monetary model restrictions in a dynamic error correction framework leads to exchange rate forecasts which are superior to those generated by a random walk forecasting model.

Subject: Econometric analysis, Exchange rate assessments, Exchange rate modelling, Exchange rates, Foreign exchange, National accounts, Personal income, Vector autoregression

Keywords: Dynamic error, Exchange rate, Exchange rate assessments, Exchange rate modelling, Exchange rates, Integrating vector, Likelihood ratio statistic, Personal income, Phillips-Perron statistics, Test statistic, Time series, Vector autoregression, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1992/034
Stock No:

WPIEA0341992
ISBN:

9781451978803
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 40, No. 1, March 1993.

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