Reexamining the monetary approach to the exchange rate: the dollar-franc, 1976—90

MacDonald, R. and Taylor, M. P. (1994) Reexamining the monetary approach to the exchange rate: the dollar-franc, 1976—90. Applied Financial Economics, 4(6), pp. 423-430. (doi:10.1080/758518674)

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Abstract

Using data on the dollar-franc, we reexamine the monetary model of exchange-rate determination in two ways. First, we test its validity as a long-run exchange rate model, using multivariate cointegration techniques. Second, we examine and test the model in its short-run, forward-looking, rational-expectations formulation. We argue that previous tests of the short-run model may have been incorrectly implemented. Using a variant of the Campbell-Shiller technique for testing present-value models, we demonstrate that the static monetary equation has some long-run validity; that, assuming monetary exchange-rate fundamentals, the speculative-bubbles hypothesis is rejected; but that the forward-looking rational expectations restrictions are resoundingly also rejected.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:MacDonald, Professor Ronald
Authors: MacDonald, R., and Taylor, M. P.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Applied Financial Economics
Publisher:Taylor and Francis
ISSN:0960-3107
ISSN (Online):1466-4305

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