{
  "title": "The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting",
  "publication": "IMF Working Papers, May 1, 1992",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784",
  "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784",
  "overlayPath": "/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784/index.md",
  "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.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Re-examines the monetary approach to the exchange rate using monthly data on the deutschemark-dollar exchange rate.\n- Using the Campbell-Shiller technique for testing present value models, the authors reject the restrictions imposed upon the data by the forward-looking rational expectations monetary model.\n- The monetary model is validated as a long-run equilibrium condition.\n- Imposing the long-run monetary model restrictions in a dynamic error correction framework yields exchange rate forecasts superior to those generated by a random walk forecasting model."
    },
    {
      "heading": "Methodology and Key Findings",
      "content": "- Data: monthly deutschemark-dollar exchange rate.\n- Testing approach: Campbell-Shiller technique for present value models.\n- Findings:\n  - Rejection of forward-looking rational expectations monetary model restrictions when tested against the data.\n  - Validation of the monetary model as a long-run equilibrium relationship.\n  - Dynamic error correction framework that incorporates long-run monetary model restrictions improves forecast performance relative to a random walk."
    },
    {
      "heading": "Forecasting Implications",
      "content": "- Forecasts generated from a dynamic error correction model that enforces long-run monetary model restrictions outperform random walk forecasts for the deutschemark-dollar exchange rate."
    },
    {
      "heading": "Subject Areas and Keywords",
      "content": "- Subject: Econometric analysis; Exchange rate assessments; Exchange rate modelling; Exchange rates; Foreign exchange; National accounts; Personal income; Vector autoregression\n- 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\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784/index.md)",
    "[Structured JSON version](/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784/index.json)",
    "[Bundle manifest](/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784/bundle-manifest.json)",
    "Authors: Ronald MacDonald, Mark P. Taylor",
    "Published: May 1, 1992",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451978803.001",
    "Re-examines the monetary approach to the exchange rate using monthly data on the deutschemark-dollar exchange rate.",
    "Using the Campbell-Shiller technique for testing present value models, the authors reject the restrictions imposed upon the data by the forward-looking rational expectations monetary model.",
    "The monetary model is validated as a long-run equilibrium condition.",
    "Imposing the long-run monetary model restrictions in a dynamic error correction framework yields exchange rate forecasts superior to those generated by a random walk forecasting model.",
    "Data: monthly deutschemark-dollar exchange rate.",
    "Testing approach: Campbell-Shiller technique for present value models.",
    "Findings:",
    "Forecasts generated from a dynamic error correction model that enforces long-run monetary model restrictions outperform random walk forecasts for the deutschemark-dollar exchange rate.",
    "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"
  ],
  "alternates": {
    "markdown": "/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784/index.md",
    "json": "/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784/index.json",
    "bundleManifest": "/en/publications/wp/issues/2016/12/30/the-monetary-approach-to-the-exchange-rate-rational-expectations-long-run-equilibrium-and-784/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-17T07:52:06.328Z"
}