Exchange Rate Economics: Theories and Evidence

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Table 6.2 Cointegration results for the monetary model Source, currencies, period m m ∗ y y ∗ i s i s∗ i l i l∗ Cointegrated? Method? Baillie–Selover (1987); Y–$ 0.065 — 0.458 — 0.005 — 0.035 — No Engle–Granger 1973:3–1983:12 Baillie–Selover (1987) C$–$, −0.466 — −0.047 — 0.010 — −0.003 — No Engle–Granger 1973:3–1983:12 Kearney–MacDonald (1990) A$–$ 0.186 — 0.946 — 0.022 — −0.012 — Yes Engle–Granger 1984:1–1988:12 MacDonald–Taylor (1993) DM–$,1 — −1 — 0.049 −0.050 — — Yes Johansen 1976:1–1990:12 MacDonald–Taylor (1994) £–$, −0.471 1.06 −0.733 −0.284 — — −0.052 0.004 No Engle–Granger 1976:1–1990:12 MacDonald–Taylor (1993) £–$,0.209 −0.49 −0.098 0.646 — — 0.035 0.086 Yes Johansen 1976:1–1990:12 Cushman et al. (1997) Turkish lira–$ 0.21 — −1.13 — 1.14 — — — Yes Johansen 1981Q3–1992Q4 Kouretas (1997) C$–$ −0.12 −0.79 −0.32 0.32 0.08 −0.02 — — Yes Dynamic OLS 1970:6–1994:5 Source: MacDonald and Swagel (2000). Note When a single coefficient is reported in two adjacent columns,this indicates that the coefficient has been constrained to be equal and opposite across the two variables.
146 Empirical evidence on the monetary approach the linearly independent cointegrating vectors and the α matrix is interpreted as the adjustment matrix,indicating the speed with which the system responds to last period’s deviation from the equilibrium level of the exchange rate. Hence the existence of the VECM model,relative to say a VAR in first differences,depends upon the existence of cointegration. The existence of cointegration amongst the variables contained in x is determined by two tests proposed by Johansen. The likelihood ratio,or Trace,test statistic for the hypothesis that there are at most r distinct cointegrating vectors is TR = T N∑ i=r+1 ln(1 − ˆλ i ),(6.20) where ˆλ r+1 , ..., ˆλ N are the N −r smallest squared canonical correlations between x t−k and x t series (where all of the variables entering x t are assumed I (1)),corrected for the effect of the lagged differences of the x t process (for details of how to extract the λs see Johansen 1988,and Johansen and Juselius 1990). In Table 6.3 we report the estimated Trace statistics from MacDonald and Taylor (1991),along with the corresponding 5% critical values,and these indicate that there are up to three significant cointegrating vectors for the mark. 3 The finding of multiple cointegrating vectors when the methods of Johansen are applied is a common one in the exchange rate literature,and is something we discuss later. MacDonald and Taylor focus on the first cointegrating vector and test hypotheses of the form: Hypothesis : β ={H 1 φ 1 }. In particular,they test if the coefficients on the home and foreign money supplies are equal to plus and minus unity and if the income elasticity of money demand is equal to minus one. These restrictions in fact go through for the mark–dollar rate, since the appropriate likelihood ratio test statistic is 18.77 with a p-value of 0.72 Table 6.3 Cointegration results for the mark–dollar exchange rate Null hypothesis Trace 5% critical System consists of: [s, m, m ∗ , y, y ∗ , i, i ∗ ] r ≤ 6 1.43 0.09 r ≤ 5 6.33 19.96 r ≤ 4 18.17 34.91 r ≤ 3 39.19 53.12 r ≤ 2 77.10 76.07 r ≤ 1 115.8 102.1 r ≤ 0 159.8 131.7 Source: MacDonald and Taylor (1993).
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Exchange Rate Economics Exchange Ra
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Firstpublished2007 by Routledge 2Pa
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Contents List of figures List of ta
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Figures 1.1 The balance of payments
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Figures 13.6 Fourth generation spec
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Preface This book is the second edi
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2 Introduction Although the textboo
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4 Introduction (orders to buy/sell
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6 Introduction Table 1.3 Currency d
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8 Introduction a truly flexible exc
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10 Introduction this has to be sati
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12 Introduction likely that the rel
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14 Introduction or F (1 + i) = S (1
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16 Introduction Consider now a fall
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18 Introduction The empirical evide
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20 Introduction (mean and variance)
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22 Introduction (a) (b) 0.3 0.25 0.
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24 Introduction clusters or that it
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26 Introduction 0.1 0.05 0 -0.05 -0
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28 Introduction 1.9 Exchange rate r
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30 Introduction fixed versus flexib
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32 Introduction influences. For exa
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34 Introduction 1.11 The determinan
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36 Introduction In the standard OCA
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38 Introduction most transactions i
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40 Purchasing power parity and the
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3 The economics of the PPP puzzle I
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70 The economics of the PPP puzzle
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Page 109 and 110: 4 The flexible price monetary appro
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Page 151 and 152: 136 Empirical evidence on the monet
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196 Currency substitution and portf
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198 Currency substitution and portf
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200 Real exchange rate determinatio
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228 Equilibrium exchange rates rate
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230 Equilibrium exchange rates A nu
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232 Equilibrium exchange rates long
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234 Equilibrium exchange rates 5.1
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236 Equilibrium exchange rates term
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238 Equilibrium exchange rates 0.30
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240 Equilibrium exchange rates Detk
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242 Equilibrium exchange rates US i
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244 Equilibrium exchange rates The
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246 Equilibrium exchange rates 9.6.
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248 Equilibrium exchange rates 9.6.
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250 Equilibrium exchange rates Conc
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252 The new open economy macroecono
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11 The new open economy macroeconom
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290 Target zone models 12.1 The bas
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292 Target zone models stochastic c
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294 Target zone models moves from 2
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296 Target zone models where A 1 an
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298 Target zone models expected dev
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300 Target zone models % expected d
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302 Target zone models MacDonald (2
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304 Target zone models for the DM-l
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306 Target zone models explicit ban
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308 Target zone models Table 12.1 F
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310 Target zone models short-term i
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312 Target zone models the UK short
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314 Speculative attack models and c
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340 Market microstructure approach
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15 Spot and forward exchange rates
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Notes 1 Introduction: some basic co
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398 Notes 4 Although the split betw
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400 Notes 3 The fact that the utili
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402 Notes 15 This result is familia
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404 Notes 6 Where ∫ ∞ vg(v) E(v
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406 References Artis,M. and M. Lewi
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408 References Bergin,P.,R. Glick a
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410 References Calvo,G.A. and C.A.
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412 References Clark,P.B. and R. Ma
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414 References Detken,C.,A. Dieppe,
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416 References Edwards,S. and I. Ma
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418 References Fischer,S. (2001),
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420 References Frieden,J.P.G. and E
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422 References Granger,C.W. and T.
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424 References Hooper,P. and J. Mor
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426 References Kearney,C. and R. Ma
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428 References Lewis,K. (1988),‘T
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430 References MacDonald,R. (2002),
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432 References Mark,N.C. (2001),Int
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434 References Obstfeld,M. and K. R
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436 References Roll,R. (1979),‘Vi
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438 References Tauchen,G.E. and M.
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Index Abadir,K. 389 Abuaf,N. 60 Adl
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442 Index Diba,B. 177-8 Dickey,D.A.
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444 Index Gagnon,J. 212 Gali,J. 128
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446 Index Miller,M.H. 120,123,128,1
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448 Index purchasing power parity (
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450 Index trade: interbank trade 34
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Exchange Rate Economics: Theories and Evidence

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