The Monetary Exchange Rate Model as a Long-Run Phenomenon

Abstract

Pure time series-based tests fail to find empirical support for monetary exchange rate models. In this paper we apply pooled time series estimation on a forward-looking monetary model, resulting in parameter estimates which are in compliance with the underlying theory. Based on a panel version of the Engle and Granger [Engle, R.F., Granger, C.W.J., 1987. Co-integration and error correction: representation, estimation and testing, Econometrica 55, 251–276] two-step procedure we find that the residuals of the panel-based estimated monetary model are stationary. This indicates that on a pooled time series level there is cointegration between the exchange rate and the macroeconomic fundamentals of this monetary model.

Citation

Groen, J. J. J. (2000), “The Monetary Exchange Rate Model as a Long-Run Phenomenon” Journal of International Economics: Vol. 52, pages 299–319.