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Identifying Linear Restrictions on the Monetary Exchange Rate Model and the Uncovered Interest Parity: Cointegration Evidence from the Canadian-U.S. Dollar

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  • Georgios P. Kouretas

Abstract

In this paper, the long-run validity of the monetary model for the Canadian-U.S. dollar is reexamined. The time-series properties of the variables are examined with the use of nonseasonal and seasonal unit root and stationarity tests, and it is shown that they are I(1) processes with no seasonal effects. Two significant cointegration vectors are discovered using Johansen's methodology, but the system is found to be overidentified and, hence, the authors are unable to assign the monetary model with either vector. Parameter stability of Johansen's results is tested using the recursive methodology developed by H. Hansen and S. Johansen (1993).

Suggested Citation

  • Georgios P. Kouretas, 1997. "Identifying Linear Restrictions on the Monetary Exchange Rate Model and the Uncovered Interest Parity: Cointegration Evidence from the Canadian-U.S. Dollar," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 875-890, November.
    • Handle: RePEc:cje:issued:v:30:y:1997:i:4:p:875-90
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    Cited by:

    1. Diamandis, Panayiotis F. & Georgoutsos, Dimitris A. & Kouretas, Georgios P., 2000. "The monetary model in the presence of I(2) components: long-run relationships, short-run dynamics and forecasting of the Greek drachma," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 917-941, December.
    2. Lee Chin & M. Azali & Zulkornain Yusop & Mohammed Yusoff, 2007. "The monetary model of exchange rate: evidence from The Philippines," Applied Economics Letters, Taylor & Francis Journals, vol. 14(13), pages 993-997.
    3. Stephanos Papadamou & Thomas Markopoulos, 2012. "The Monetary Approach to the Exchange Rate Determination for a “Petrocurrency”: The Case of Norwegian Krone," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 18(3), pages 299-314, August.
    4. Diamandis, Panayiotis F. & Georgoutsos, Dimitris A. & Kouretas, Georgios P., 1998. "The Monetary Approach to the Exchange Rate: Long-Run Relationships, Identification and Temporal Stability," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 741-766, October.
    5. Lee Chin & Muzafar Shah Habibullah & M. Azali, 2009. "Tests of different monetary aggregates for the monetary models of the exchange rate in five ASEAN countries," Applied Economics, Taylor & Francis Journals, vol. 41(14), pages 1771-1783.
    6. Ekpeno L. Effiong, 2014. "Exchange Rate Dynamics and Monetary Fundamentals: A Cointegrated SVAR Approach for Nigeria," Global Business Review, International Management Institute, vol. 15(2), pages 205-221, June.
    7. David O. Cushman, 2000. "The failure of the monetary exchange rate model for the Canadian‐U.S. dollar," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 33(3), pages 591-603, August.
    8. Lee Chin & M. Azali & A. Mansur M. Masih, 2009. "Tests of the different variants of the monetary model in a developing economy: Malaysian experience in the pre- and post-crisis periods," Applied Economics, Taylor & Francis Journals, vol. 41(15), pages 1893-1902.
    9. Lee Chin & M. Azali, 2012. "Testing the validity of the monetary model for ASEAN with structural break," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3229-3236, September.
    10. Adawo, Monday A. & Effiong, Ekpeno L., 2013. "Monetary exchange rate model as a long-run phenomenon: evidence from Nigeria," MPRA Paper 46407, University Library of Munich, Germany.
    11. Nejib Hachicha, 2003. "Capital Inflows-National Saving Dynamics in Tunisia: Evidence from Cointegration, Weak Exogeneity and Simultaneous Error Correction Modelling," International Economic Journal, Taylor & Francis Journals, vol. 17(4), pages 43-60.
    12. Panayiotis Diamantis & Dimitris Georgoutsos & George Kouretas, 2001. "The Monetary Approach in the Presence of I(2) Components: A Cointegration Analysis of the Official and Black Market for Foreign Currency in Latin America," Working Papers 0108, University of Crete, Department of Economics.
    13. Lee, Chin & Law, Chee-Hong, 2013. "The Effects of Trade Openness on Malaysian Exchange Rate," MPRA Paper 45185, University Library of Munich, Germany.
    14. Abbott, Andrew & De Vita, Glauco, 2002. "Testing the long-run structural validity of the monetary exchange rate model," Economics Letters, Elsevier, vol. 75(2), pages 157-164, April.
    15. Seppo Pynnönen & Warren Hogan & Jonathan Batten, 2002. "Expectations and Liquidity in Yen Bond Markets," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 7(3), pages 335-354.

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