The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting

28 Pages Posted: 15 Feb 2006

See all articles by Ronald MacDonald

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR); Brookings Institution

Date Written: May 1992

Abstract

We re-examine the monetary approach to the exchange rate from a number of perspectives, using monthly data on the deutschemark-dollar exchange rate. Using the Campbell-Shiller technique for testing present value models, we reject the restrictions imposed upon the data by the forward-looking rational expectations monetary model. We demonstrate, however, that the monetary model is validated as a long-run equilibrium condition. Moreover, imposing the long-run monetary model restrictions in a dynamic error correction framework leads to exchange rate forecasts which are superior to those generated by a random walk forecasting model.

JEL Classification: F31

Suggested Citation

MacDonald, Ronald R. and Taylor, Mark P., The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium and Forecasting (May 1992). IMF Working Paper No. 92/34, Available at SSRN: https://ssrn.com/abstract=884727

Ronald R. MacDonald (Contact Author)

University of Strathclyde in Glasgow - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom
+44 141 548 3861 (Phone)

Government of New Zealand - Department of Economics

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
711
Abstract Views
2,915
rank
52,287
PlumX Metrics