Is the Monetary Model Useful in Explaining Exchange Rates? - Panel Cointegration Evidence

Byung Chul Ahn ; Keun-Yeob Oh

Associate Professor, School of Economics and Finance, Yeungnam University, 214-1 Daedong, Kyungsan, Kyungbuk 712-749, Korea, Tel: +82-53-810-2726, Fax: +82-53-812-5321 ahnbc@yu.ac.kr
Associate Professor, Department of International Management, Chungnam University, Tae-Jeon City 305-764, Korea, Tel: +82-42-821-5560, Fax: +82-42-823-5359 kyoh@hanbat.chungnam.ac.kr

JEL Classification: F31

Abstract

A number of studies have sought to provide a reasonable explanation for exchange rate determination. The most frequently used approach is based on monetary models. However, it is difficult to find a cointegration relationship between exchange rates and relative differentials of money and income using this approach. This does not mean that a cointegration relationship does not exist. Conventional single equation approaches simply have a low performance power. We employed the panel cointegration approach to overcome this potential problem. We formulated a system of monetary models for 8 nations and found that cointegration relationships existed. Given these cointegration relationships, we estimated cointegrating vectors that are consistent with theoretical signs and magnitude.

Keywords:

Monetary model, Panel cointegration

Acknowledgments

We are grateful for helpful suggestions by anonymous referees.

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