Exchange Rate Predictability and Monetary Fundamentals in a Small Multi-country Panel.
In this paper a panel of vector error-correction models based on a common long-run relationship is utilized to test whether the Euro exchange rates of Canada, Japan, and the United States have a long-run link with monetary fundamentals. We use both exchange relationships relative to the full EMU area (with synthetic aggregates for the pre-EMU period) and relative to Germany solely. Compared to existing cointegration frameworks our approach provides more evidence that the aforementioned exchange rates are consistent with a rational expectations-based monetary exchange rate model based on a common long-run relationship, albeit with a long-run impact of relative income that is higher than predicted by the theory. As a next step we analyze the out-of-sample fit of this common long-run exchange rate model relative to naive random walk-based forecasts. These forecasting evaluations indicate that the monetary fundamentals-based common long-run model is superior to both random walk-based forecasts and standard cointegrated VAR model-based forecasts, especially at horizons of 2 to 4 years.
Year of publication: |
2005
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Authors: | Groen, Jan J J |
Published in: |
Journal of Money, Credit and Banking. - Blackwell Publishing. - Vol. 37.2005, 3, p. 495-516
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Publisher: |
Blackwell Publishing |
Saved in:
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