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Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff

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  • David Backus

Abstract

Various popular exchange rate models (a standard monetary model, a portfolio balance model, and sticky-price models) are estimated and evaluated using U.S.-Canadian data for the 1970s. Nonnested hypothesis tests demonstrate that none are correctly specified. The data suggest: 1) the exchange rate persistence observed is not fully explained by any of the models; 2) the small Durbin-Watson statistics indicate longer lags are required; 3) the current account is a useful explanatory variable; 4) the portfolio balance model fits the data well, but has potentially serious problems measuring the stock of foreign assets.
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  • David Backus, 1984. "Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff," Canadian Journal of Economics, Canadian Economics Association, vol. 17(4), pages 824-846, November.
    • Handle: RePEc:cje:issued:v:17:y:1984:i:4:p:824-46
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