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Monetary Model of Exchange Rates and Cointegration : Lecture Notes in Economic and Mathematical Systems - Javier Gardeazabal

Monetary Model of Exchange Rates and Cointegration

Lecture Notes in Economic and Mathematical Systems


Published: August 1992
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These notes draw from the Theory of Cointegration in orderto test the monetary model of exchange rate determination. Previous evidence shows that the monetary model does notcapture the short run dynamics of the exchange rate, specially when assessed in terms of forecasting accuracy. Even though the monetary equations of exchange ratedetermination may be bad indicators of how exchange ratesare determined in the short run, they couldstill describelong run equilibrium relationships between the exchange rateand its fundamentals. Stationary deviations from those longrun relationships are allowed in the short run. This bookalso addresses severalissues on Cointegration. Chapter 6studies the small sample distribution of the likelihoodratio test statistics (on the dimension and restrictions onthe cointegrating space) under deviations from normality. This monograph also focuses on the issue of optimalprediction in partially nonstationary multivariate timeseries models. In particular, it caries out an exchange rateprediction exercise.

1. Introduction.- 2. The Monetary Model of Exchange Rate Determination.- I. Introduction.- II. Monetary Models.- III. The Asset Market View.- IV. Empirical Evidence.- V. Treatment of Nonstationary Variables.- 3. Long Run Exchange Rate Determination I.- I. Introduction.- II. Some Preliminary Definitions and Engle and Granger Procedure.- III. Interpretation of Previous Results in terms of Cointegration.- IV. Testing for Cointegration Using Engle and Granger Methodology.- V. Empirical Results.- VI. Conclusions.- Appendix A.- 4. Long Run Exchange Rate Determination II.- I. Introduction.- II. Description of The Time Series Model.- III. The Data And Diagnostic Tests.- III.1. Data Description.- III.2. Diagnostic Tests on the Assumptions of the VAR.- IV. Estimation And Testing For Cointegration.- V. Tests of Several Hypotheses.- V.1. Testing for Known Cointegrating Vectors.- V.1.1 Testing for Trivial Cointegrating Vectors.- V.1.2. Testing for Cointegration between Fundamentals.- V.2. Tests of the same Linear Restrictions on all Cointegrating Vectors.- V.2.1. Testing the Exclusion of a Variable from all Cointegrating Vectors.- V.2.2 Testing for the Restrictions of a Monetary Equation.- VI. Conclusions.- Appendix A.- Appendix B.- 5. Short Run Exchange Rate Determination.- I. Introduction.- II. Weak Exogeneity of the Exchange Rate.- III. Testing for Weak Exogeneity.- IV. The Asset Market View Derived from an Error Correction Model.- V. Conclusions.- Appendix A.- 6. Effect of Non-Normal Disturbances on Likelihood Ratio Tests.- I. Introduction.- II. The Data Generating Process.- III. Hypotheses Tests.- III.1. Tests on the Number of Cointegrating Vectors.- III.2. Tests of Linear Restrictions on the Cointegrating Vector.- III.3. Tests of Restrictions on the Loadings Matrix.- IV. The Simulation Exercise.- IV.1. Empirical Size of the Tests.- IV.2. Power of the Tests.- V. Conclusions.- Appendix A: Size of the Tests.- Appendix B: Power of the Tests.- 7. Estimation of the Time Series Model.- I. Introduction.- II. Two Different Interpretations of the Time Series Model.- III. Estimation of the Model.- III.1. Unrestricted Model.- III.2. Restricted Short Run Dynamics.- III.3. Restricted Long Run Dynamics.- III.4. Restricted Short and Long Run Dynamics.- III.4.1. Gaussian Reduced Rank Maximum Likelihood Estimator.- III.4.2. Two Step Procedure.- 8. Prediction in Cointegrated Systems.- I. Introduction.- II. Properties of the True Forecasts from a Cointegrated System.- III. Estimated Forecasts from a Cointegrated System.- 9. Nominal Exchange Rate Prediction.- I. Introduction.- II. Review of Literature.- III. Forecasting Exercise.- IV. Conclusions.- Appendix A.- 10. A Simulation Exercise.- I. Introduction.- II. The Data Generating Process.- III. Results.- Appendix A.- 11. Conclusions.- Data Appendix.

ISBN: 9783540556350
ISBN-10: 3540556354
Series: Lecture Notes in Economic and Mathematical Systems
Audience: General
Format: Paperback
Language: English
Number Of Pages: 194
Published: August 1992
Publisher: Springer-Verlag Berlin and Heidelberg Gmbh & Co. Kg
Country of Publication: DE
Dimensions (cm): 24.41 x 16.99  x 1.14
Weight (kg): 0.35