The failure of the monetary model of exchange rate determination



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Afat, Dinçer and Gómez-Puig, Marta and Sosvilla-Rivero, Simón (2015) The failure of the monetary model of exchange rate determination. [ Documentos de Economía y Finanzas Internacionales; nº 15-05, ISSN: 1696-6376 ]

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In this paper, we test three popular versions of the monetary model (flexible price, forward-looking and real interest differential models) for the OECD member countries by applying Johansen cointegration technique. Based on country-by-country analysis, we conclude that monetary models do not provide the expected results. We reveal several shortcomings of the models and examine the building blocks of the fundamental version. Although researchers always blame the deviations from purchasing power parity as the reason for the failure of the monetary model, our analysis indicates that invalidity of Keynesian money demand function is also responsible for unfavourable results.

Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Exchange rate; Flexible price monetary model; Forward-looking monetary model; Real interest differential model; Money demand; Purchasing power parity
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > World economy
Social sciences > Economics > Finance
JEL:F31, F41
Series Name:Documentos de Economía y Finanzas Internacionales
ID Code:30611
Deposited On:22 Jun 2015 11:45
Last Modified:19 Dec 2018 09:59

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