The Monetary Model of Exchange Rates and Cointegration: Estimation, Testing and Prediction(385 Lecture Notes in Economics and Mathematical Systems)

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.

Table of Contents:
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.- IV. Estimation And Testing For Cointegration.- V. Tests of Several Hypotheses.- 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.- IV. The Simulation Exercise.- 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.- 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.