dEjournals Home Page
Competitio
Online ready Current Most Read Archives Search
Register Login

Competitio

Vol. 13 No. 2 (2014)
Papers

Testing the long run equilibrium relationship between the nominal exchange rate and monetary macro-fundamentals

Published:
2014-12-15
DOI Linkhttps://doi.org/10.21845/comp/2014/2/3
Author
Andrea Szabo
View
PDF (Hungarian)
Keywords
monetary exchange rate models purchasing power parity panel cointegration test
How To Cite
Selected Style: APA
Szabo, A. (2014). Testing the long run equilibrium relationship between the nominal exchange rate and monetary macro-fundamentals. Competitio, 13(2), 36-58. https://doi.org/10.21845/comp/2014/2/3
Abstract

The pure time series testing of long-run monetary models of exchange rate determination and its fundamental building block, purchasing power parity, in the most cases fails to support the conjectures of the theory. Thus, the empirical literature increasingly uses the panel technique when testing both models because the power of the panel unit root and panel cointegration tests seems higher than their time series obverse. In the article we examine the validity of the monetary exchange rate models and purchasing power parity over the period 1996Q1-2011Q4 for US dollar exchange rates of 15 OECD countries using
panel cointegration tests. The results show moderate empirical support for monetary exchange rate models and also purchasing power parity.

Journal of Economic Literature (JEL) codes: F31, F41, C33

References
  1. Baltagi, B. H. (2008): Econometric Analysis of Panel Data. John Wiley, Chichester.
  2. Basher, S. A. − Westerlund, J. (2009): Panel cointegration and the monetary exchange rate model. Economic Modelling, Vol. 26, No. 2:506–513.
  3. Bilson, J. (1978): The monetary approach to the exchange rate – some empirical evidence. IMF Staff Papers 25, Vol. 1:48–75.
  4. Dickey, D. A. − Fuller, W. A. (1979): Distribution of the Estimators for Autoregressive Time Series With a Unit Root. Journal of the American Statistical Association, Vol. 74, No. 366:427–431.
  5. Dornbush, R. (1976): Expectations and Exchange Rate Dynamics. Journal of Political Economy, Vol. 84, No. 6:1161–1176.
  6. Engle, R. F. − Granger, C. W. J. (1987): Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica, Vol. 55, No. 2:251–276.
  7. Frankel, J. A. (1979): On the mark: a theory of floating exchange rates based on real interest rate differentials. The American Economic Review, Vol. 69, No. 4:610–622.
  8. Frankel, J. A. (1984): Tests of monetary and portfolio balance models of exchange rate determination. In: John F. O. Bilson − Richard C. Marston (eds.) (1984): Exchange Rate Theory and Practice. University of
  9. Chicago Press:239–260. http://www.nber.org/chapters/c6837.pdf?new_window=1, Letöltve: 2011. 12. 16.
  10. Frenkel, J. A. (1976): A monetary approach to the exchange rate: Doctrinal aspects and empirical evidence. Scandinavian Journal of Economics, Vol. 78, No. 2:169–191.
  11. Frenkel, J. A. (1981): The Collapse of Purchasing Power Parities During the 1970’s. European Economic Review, Vol. 16, No. 1:145–165.
  12. Groen, J. J. (2000): The monetary exchange rate model as a long run phenomenon. Journal of International Economics, Vol. 52, No. 2:299–319.
  13. Hadri, K. (2000): Testing for stationarity in heterogeneous panel data. The Econometrics Journal, Vol. 3, No. 2:148–161.
  14. Hendry, D. F. − Juselius, K. (2000): Explaining cointegration analysis: Part I. The Energy Journal, Vol. 21, No. 1:1–42.
  15. Im, K. S. – Lee, J. – Tieslau, M. (2005): Panel LM unit-root tests with level shifts. Oxford Bulletin of Economics and Statistics, Vol. 67, No. 3:393–419.
  16. Im, K. S. − Pesaran, M. H. − Shin, Y. (2003): Testing for unit roots in heterogeneous panels. Journal of Econometrics, Vol. 115, No. 1:53–74.
  17. Krugman, P. R. (1978): Purchasing Power Parity and Exchange Rates: Another Look at the Evidence. Journal of International Economics, Vol. 8, Issues 3:397-407.
  18. Kwiatkowski, D. − Phillips, P. C. − Schmidt, P. − Shin, Y. (1992): Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal
  19. of Econometrics, Vol. 54, No. 1:159–178.
  20. Macdonald, R. − Taylor, M. P. (1992): Exchange rate economics: a survey. Staff Papers-International Monetary Fund, Vol. 39, No. 1:1–57.
  21. Maddala, G. S. − Wu, S. (1999): A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, Vol. 61, No. S1:631–652.
  22. Mark, N. C. − Sul, D. (2001): Nominal exchange rates and monetary fundamentals. Evidence from a small post-Bretton woods panel. Journal of International Economics, Vol. 53, No. 1:29–52.
  23. Meese, R. A. (1986): Testing for bubbles in exchange markets: a case of sparkling rates. Journal of Political Economy, Vol. 94, No. 2:345–373.
  24. Meese, R. A. − Rogoff, K. S. (1983): Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample? Journal of International Economics, Vol. 14, No. 1-2:3–24.
  25. Ng, S. − Perron, P. (2001): Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power. Econometrica, Vol. 69, No. 6:1519–1554.
  26. O’Connell, P. G. J. (1998): The overvaluation of purchasing power parity. Journal of International Economics, Vol. 44, No. 1:1–19.
  27. Otero, J. − Smith, J. (2000): Testing for cointegration: power versus frequency of observation-further Monte Carlo results. Economics Letters, Vol. 67, No. 1:5–9.
  28. Papell, D. (2002): The great appreciation, the great depreciation, and the purchasing power parity hypothesis. Journal of International Economics, Vol. 57, No. 1:51–82.
  29. Pesaran, M. H. – Shin, Y. – Smith, R. P. (1999): Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, Vol. 94, No. 446:621–634.
  30. Pedroni, P. (2004): Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric theory, Vol. 20, No. 3:597–625.
  31. Pesaran, M. H. (2004): General Diagnostic Tests for Cross Section Dependence in Panels. CESifo Working Paper No. 1229, http://www.econstor.eu/bitstream/10419/18868/1/cesifo1_wp1229.pdf, Letöltve: 2013.
  32. 18.
  33. Rapach, D. E. − Wohar, M. E. (2002): Testing the monetary model of exchange rate determination: new evidence from a century of data. Journal of International Economics, Vol. 58, No. 2:359–385.
  34. Rapach, D. E. − Wohar, M. E. (2004): Testing the monetary model of exchange rate determination: a closer look at panels. Journal of International Money and Finance, Vol. 23, No. 6:867–895.
  35. Rogoff, K. (1996): The Purchasing Power Parity Puzzle. Journal of Economic Literature, Vol. 34, No. 2:647–668.
  36. Sarantis, N. (1994): The monetary exchange rate model in the long run: an empirical investigation. Weltwirtschaftliches Archiv, Vol. 130, No. 4:698–711.
  37. Shiller, R. J. − Perron, P. (1985): Testing the random walk hypothesis: power versus frequency of observation. Economics Letters, Vol. 18, No. 4:381–386.
  38. Taylor, A. M. − Taylor, M. P. (2004): The purchasing power parity debate. Journal of Economic Perspectives, Vol. 18, No. 4:135–158.
  39. Westerlund, J. (2007): Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, Vol. 69, No. 6:709–748.
Most read articles by the same author(s)