The monetary approach to the exchange rate: rational expectations, long-run equilibrium, and forecasting

MacDonald, R. and Taylor, M. P. (1993) The monetary approach to the exchange rate: rational expectations, long-run equilibrium, and forecasting. IMF Staff Papers, 40(1), pp. 89-107. (doi:10.2307/3867378)

Full text not currently available from Enlighten.

Publisher's URL: http://www.jstor.org/stable/3867378

Abstract

We reexamine the monetary approach to the exchange rate from several perspectives, using monthly data on the deutsche mark-U.S. dollar exchange rate. Using the Campbell-Shiller technique, we reject the restrictions imposed on the data by the forward-looking rational expectations monetary model. The monetary model, however, 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 that are superior to those generated by a random walk forecasting model.

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:IMF Staff Papers
Publisher:International Monetary Fund
ISSN:1020-7635

University Staff: Request a correction | Enlighten Editors: Update this record