A CVAR Scenario for a Standard Monetary Model Using Theory-Consistent Expectations

20 Pages Posted: 11 Apr 2017

See all articles by Katarina Juselius

Katarina Juselius

University of Copenhagen - Department of Economics

Date Written: April 10, 2017

Abstract

A theory-consistent CVAR scenario describes a set of testable regularities capturing basic assumptions of the theoretical model. Using this concept, the paper considers a standard model for exchange rate determination and shows that all assumptions about the model's shock structure and steady-state behavior can be formulated as testable hypotheses on common stochastic trends and cointegration. While the scenario was rejected on essentially all counts, the results were informative about the cause of the empirical failure. It was the stationarity assumptions that were too restrictive to explain the long persistent swings in the real exchange rate and the interest rate differential.

Keywords: Theory-Consistent CVAR, Expectations, International Puzzles, Long Swings, Persistence, Imperfect Knowledge

JEL Classification: F31, F41, G15, G17

Suggested Citation

Juselius, Katarina, A CVAR Scenario for a Standard Monetary Model Using Theory-Consistent Expectations (April 10, 2017). Available at SSRN: https://ssrn.com/abstract=2949831 or http://dx.doi.org/10.2139/ssrn.2949831

Katarina Juselius (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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