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An empirical investigation into the causes of failure of the monetary model of the exchange rate
Author(s) -
Smith P. N.,
Wickens M. R.
Publication year - 1986
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950010204
Subject(s) - exchange rate , random walk , econometrics , economics , series (stratigraphy) , principal (computer security) , money market , interest rate , computer science , statistics , macroeconomics , mathematics , paleontology , biology , operating system
The purpose of this paper is to attempt to provide measures of the relative importance of the principal causes of the failure of the monetary model of the exchange rate. Secondly, the random walk hypothesis for the exchange rate is tested. The methodology employed is new and has wide application elsewhere. It involves explicitly modelling the misspecification by time series techniques. The results confirm the importance of the breakdown of the PPP assumption but they also show that misspecification of the money market is equally important. The results further show that lagged information can also improve upon the random walk model of the exchange rate.