Monetary models of exchange rates and sweep programs

Jane Binner, Rakesh K. Bissoondeeal, C. Thomas Elger

Research output: Preprint or Working paperWorking paper

Abstract

Numerous studies find that monetary models of exchange rates cannot beat a random walk model. Such a finding, however, is not surprising given that such models are built upon money demand functions and traditional money demand functions appear to have broken down in many developed countries. In this paper we investigate whether using a more stable underlying money demand function results in improvements in forecasts of monetary models of exchange rates. More specifically, we use a sweepadjusted measure of US monetary aggregate M1 which has been shown to have a more stable money demand function than the official M1 measure. The results suggest that the monetary models of exchange rates contain information about future movements of exchange rates but the success of such models depends on the stability of money demand functions and the specifications of the models.
Original languageEnglish
PublisherAston University
VolumeRP0635
ISBN (Print)1-85449-639-5
Publication statusPublished - Jun 2006

Publication series

NameAston Business School research paper
PublisherAston University
No.RP0635

Keywords

  • sweep programs
  • forecasting
  • monetary models of exchange rates,

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  • Cite this

    Binner, J., Bissoondeeal, R. K., & Elger, C. T. (2006). Monetary models of exchange rates and sweep programs. (Aston Business School research paper; No. RP0635). Aston University.