Exchange Rate Modelling

by MacDonald, Ronald; Marsh, Ian

• ISBN13: 9780792386681
• ISBN10: 079238668X
• Format: Hardcover
• Copyright: 1999-11-01
• Publisher: Springer Verlag

Summary

Are foreign exchange markets efficient? Are fundamentals important for predicting exchange rate movements? What is the signal-to-ratio of high frequency exchange rate changes? Is it possible to define a measure of the equilibrium exchange rate that is useful from an assessment perspective? The book is a selective survey of current thinking on key topics in exchange rate economics, supplemented throughout by new empirical evidence. The focus is on the use of advanced econometric tools to find answers to these and other questions which are important to practitioners, policy-makers and academic economists. In addition, the book addresses more technical econometric considerations such as the importance of the choice between single-equation and system-wide approaches to modelling the exchange rate, and the reduced form versus structural equation problems. Readers will gain both a comprehensive overview of the way macroeconomists approach exchange rate modelling, and an understanding of how advanced techniques can help them explain and predict the behavior of this crucial economic variable.

Table of Contents

List of figures	ix
List of tables	xi
Introduction	1	(8)
Plan of the book	2	(2)
Unaddressed issues	4	(1)
Themes of the book	5	(4)
Spot and forward market relationship	9	(40)
Forward rate unbiasedness	10	(12)
Empirical tests of forward rate unbiasedness	11	(2)
Rationalising the findings of forward rate bias	13	(7)
Cointegration-based tests of forward rate bias	20	(2)
Rationality of expectations	22	(9)
Modelling the risk premium	31	(9)
Latent variable models of the risk premium	33	(1)
ARCH models of the risk premium	34	(2)
The portfolio balance --mean variance approach to risk	36	(2)
Miscellaneous risk models	38	(2)
Summary and conclusions	40	(9)
Purchasing Power Parity: Long and Short Run Testing	49	(30)
Purchasing power parity: traditional PPP versus the efficient markets hypothesis	50	(6)
Testing traditional PPP against EMPPP using real exchange rates	55	(1)
PPP and exchange rate forecasting	56	(3)
The power of unit root tests and the span of the data	59	(5)
Increasing the span by increasing the time dimension	60	(1)
Increasing the span by increasing the cross-section dimension	60	(4)
Sticky prices versus the traded-non traded bias: A first pass at Balassa-Samuelson	64	(2)
Does geography matter? A linear and non-linear perspective	66	(4)
Transactions costs versus nominal exchange rate volatility	66	(2)
Transactions costs and non-linear adjustment	68	(2)
Summary and conclusions	70	(9)
The Monetary Approach to Exchange Rate Modelling	79	(32)
The flexible price monetary approach (FLMA)	81	(3)
The magnification effect	82	(1)
Speculative bubbles	83	(1)
The sticky price variant of the monetary approach (SPMA)	84	(4)
The hybrid monetary model, or RID	88	(2)
Empirical evidence on the monetary model	90	(6)
Some monetary approach reduced forms	90	(1)
Early empirical evidence on monetary model	90	(2)
Recent empirical evidence on the monetary model	92	(4)
Estimation and interpretation of the monetary model	96	(10)
Money market equilibrium	96	(4)
Foreign exchange market equilibria	100	(2)
Equilibrium in the gross system	102	(1)
An impulse response analysis of dynamic interactions	103	(2)
Forecasting and the random walk redux	105	(1)
Summary and conclusions	106	(5)
Modelling Departures from Purchasing Power Parity	111	(34)
An eclectic exchange rate model	112	(5)
The general price level channel and the demand and supply for money	113	(1)
The balance of payments and the real exchange rate	114	(3)
An empirical application of the EERM	117	(11)
The long-run relationship	118	(4)
Impulse response functions	122	(3)
Variance decompositions	125	(3)
Related research on real exchange rate modelling	128	(6)
A constant equilibrium exchange rate	128	(2)
Non-constant equilibrium -- productivity and terms of trade	130	(2)
Behavioural equilibrium exchange rates versus fundamental equilibrium exchange rates	132	(2)
Structural VAR modelling	134	(5)
Concluding comments	139	(6)
High Frequency Exchange Rate Modelling	145	(28)
Cointegration and VAR modelling	147	(9)
Cointegrating relationships	148	(1)
Short-run dynamic relationships	149	(2)
Empirical results: Cointegration and forecast performance	151	(5)
Discussion	156	(1)
A univariate modelling technique	156	(11)
Simple switching models	157	(4)
Estimation	161	(5)
Discussion	166	(1)
Conclusion	167	(6)
Long-Run Econometric Modelling of Exchange Rates	173	(34)
Systems modelling	173	(1)
A small system for exchange rate modelling	174	(5)
Bilateral exchange rate models	179	(9)
Long-run relationships	179	(2)
A parsimonious representation	181	(3)
Beating a random walk and the creme de la creme of forecasters: Some out-of-sample forecasting results	184	(4)
A tri-polar system of exchange rates	188	(15)
Long-run equilibria in the tri-polar system	190	(5)
Generalised impulse response analysis	195	(4)
Forecasting accuracy	199	(4)
Conclusions	203	(4)
Conclusion	207	(4)
Index of authors	211	(6)
Index of subjects	217