IDENTIFICATION AND ESTIMATION OF EXCHANGE RATE MODELS WITH UNOBSERVABLE FUNDAMENTALS

This article is concerned with issues of model specification, identification, and estimation in exchange rate models with unobservable fundamentals. We show that the continuous-time model proposed by Gardeazabal, Regúlez, and Vázquez ("International Economic Review" 38 (1997), 389-404) is not identified and that this property is characteristic of the discrete-time representation of the model that they used as the basis for estimation by simulated method of moments. We briefly discuss the implications of this result in the context of the asset-market model of exchange rates with unobservable fundamentals. Copyright 2006 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.