Monetary models of exchange rates and sweep programs

Rakesh Bissoondeeal, Jane M. Binner, Thomas Elger

Research output: Contribution to journalArticlepeer-review

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 article, 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 sweep-adjusted 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
Pages (from-to)1117-1129
Number of pages13
JournalApplied Financial Economics
Volume19
Issue number14
DOIs
Publication statusPublished - Jul 2009

Keywords

  • monetary models
  • exchange rates
  • random walk model

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