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The Exchange Rate Disconnect Puzzle Revisited
Author(s) -
BahmaniOskooee Mohsen,
Hosny Amr,
Kishor N. Kundan
Publication year - 2015
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1504
Subject(s) - cointegration , economics , exchange rate , distributed lag , autoregressive model , econometrics , monetary economics , macroeconomics
A long‐standing puzzle in the international macroeconomic literature has been the weak link between the theoretical foundations of the monetary approach to exchange rate determination and its empirical validity. This paper aims at filling this gap. We use a different econometric methodology; the Autoregressive Distributed Lag approach to cointegration, to show that exchange rates and fundamentals move together in the long‐run, thus providing support to the monetary model. We also show that fundamentals Granger cause exchange rates, both in the short‐run and the long‐run. Copyright © 2014 John Wiley & Sons, Ltd.