Econometric Approaches to Empirical Models of Exchange Rate Determination (original) (raw)

Exchange rate determination: Single-equation or economy-wide models?

Journal of Banking & Finance, 1990

We first give a brief presentation of the existing single-equation structural models of exchange-rate determination and a survey of how the exchange rate is modelled in the main economy-wide macroeconometric models. We then show, with respect to the lira/% exchange rate, that the out-of-sample predictive performance of the single-equation models is inferior to that of the simple random walk model. This confirms the thesis that only by moving away from these single-equation, semi-reduced form models towards suitable economy-wide macroeconometric models can one hope to beat the random walk. Following this course, we finally show that the Mark V version of our continuous time macroeconometric model of the Italian economy outperforms both the existing structural models and the random-walk process, in outof-sample forecasting tests concerning the lira/$ exchange rate.

Exchange Rate Determination: Single-Equation or Economy-Wide Models? A Test Against the Random Walk

1989

Exchange rate determination: Single-equation or economy-wide models? 1A test against the random walk

J Bank Finan, 1990

Testing the monetary model of exchange rate determination: new evidence from a century of data

Journal of International Economics, 2002

We test the long-run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century. Interestingly, we find support for a simple form of the long-run monetary model in over half of the countries we consider. For these countries, we estimate vector error-correction models to investigate the adjustment process to the long-run monetary equilibrium. In the spirit of Meese and Rogoff [Journal of International Economics 14 (1983) 3-24], we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naıve random walk model.

The Monetary Model of Exchange Rate Determination

Lecture Notes in Economics and Mathematical Systems, 1992

The flexible-price monetary model is examined for the Greek drachma-US dollar exchange rate. The Johansen multivariate technique of cointegration is applied to an unrestricted form of the monetary model. Using quarterly data covering the period 1974-1994, strong evidence is found in favour of the existence of co-integration between the nominal exchange rate, relative money supply, relative income and relative interest rates. The monetary model is validated as a long-run equilibrium condition.

Structural models of exchange rate determination

Journal of Multinational Financial Management, 2000

This study compares the forecasting accuracy of state space techniques based on the monetary models of exchange rate with univariate and random walk models for four countries. It is found that these structural models outperform ARIMA and random walk models for all four countries. A state space vector that contains variables based on the monetary model easily outperforms random walk as well as ARIMA models for France, Germany, UK, and Japan during the sample period of this study.

Empirical tests of the monetary approach to exchange-rate determination

Journal of International Money and Finance, 1983

There has been much discussion as to whether or not the turbulence in foreign exchange rates, that has existed since 1973, is consistent with an efficient foreign exchange market. This empirical question can only be tested relative to an equilibrium exchange-rate model. In this paper, we conduct variance tests and efficient-markets tests of three different models of exchange-rate determination; the equilibrium rational-expectations model (ERE), the currency-substitution model (CS), and Dornbusch's exchangerate-dynamics model (ERD). We find that the uncertainty in realised exchange-rate movements can only be explained by the ERD model and that actual exchange rates could have been predicted in a manner that is inconsistent with the efficient-markets hypothesis. Current theories of exchange-rate determination rely heavily on the concept of rational expectations, developed to explain price formation in financial asset markets. However, since the move to generalized floating in 1973, the subsequent large fluctuations in exchange rates have cast doubt on whether or not their determination is consistent with the averaging inherent in the rational-expectations model. These models, based on the monetary approach to the balance of payments, imply, with interest-rate parity and the assumption of an efficient foreign exchange market, that exchange-rate changes are related to a long average of money-stock differentials. 1,2 In addition, if rational expectations represent a conditional mean, they should tend to change dramatically only when important new information arrives, which should occur randomly. It would thus seem that the observed volatility of exchange rates may have to be ascribed to factors not usually incorporated into monetary models. The purpose of this paper is to examine three characterizations of the monetary approach, with an eye to determining whether spot rates are in fact too volatile to accord with these models. The variants investigated in this paper include the

Structural, VAR and BVAR models of exchange rate determination: A comparison of their forecasting performance

Journal of Forecasting, 1995

This paper compares the out-of-sample forecasting accuracy of a wide class of structural, BVAR and VAR models for major sterling exchange rates over different forecast horizons. As representative structural models we employ a portfolio balance model and a modified uncovered interest parity model, with the latter producing the more accurate forecasts. Proper attention to the long-run properties and the short-run dynamics of structural models can improve on the forecasting performance of the random walk model. The structural model shows substantial improvement in mediumterm forecasting accuracy, whereas the BVAR model is the more accurate in the short term. BVAR and VAR models in levels strongly outpmdict these models formulated in difference form at all forecast horizons.

Investigating the Relevance of Meese-Rogoff Conclusion in Recent Models of Exchange-Rate Determination

SSRN Electronic Journal, 2016

This paper examines the Messe and Rogoff claim of the superiority of random-walk model in the determination of exchange rate in the light of more recent models and empirical results. Random walk model is the traditional model of exchange rate determination while the recent models include the purchasing power parity (PPP), the monetary model and portfolio model. Empirical evidence against the dominance of random-walk in forecasting the behaviours of exchange rate seems to be large or rather inconclusive, since the main thrust of some of the findings is that Messe and Roggoff used out-of-sample test with shorter time horizon which does not have a good econometric justification. Although it cannot be absolutely concluded that economic models are useless in the determination of exchange rate, the relevance of a model in the determination of exchange rate depends on the combination of different factors which vary with time and place.

Econometric Approaches to Empirical Models of Exchange Rate Determination (original) (raw)

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