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A Comparison of the Current Account and the Monetary Theories of Exchange Rate Determination

Author

Listed:
  • Augustine C. Arize
  • Ioannis N. Kallianiotis
  • John Malindretos
  • Alex Panayides
  • Demetri Tsanacas

Abstract

In this study, we develop a way to test for the two theories, the Monetary and the current account, in explaining exchange rate determination. The approach we develop has two components to it. The first is a test of the appropriate signs. That is, the two theories disagree on the signs of the determining variables. Thus, depending on the sign of the regressors, we can prove the one, or the other. The second sub test is one which has to do with the speed of adjustment. Specifically, importance should be depicted in a quicker speed of adjustment. On that issue, if real(monetary) variables adjust faster, then it supports the traditional (monetary) view.

Suggested Citation

  • Augustine C. Arize & Ioannis N. Kallianiotis & John Malindretos & Alex Panayides & Demetri Tsanacas, 2018. "A Comparison of the Current Account and the Monetary Theories of Exchange Rate Determination," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 102-107, February.
    • Handle: RePEc:ibn:ijefaa:v:10:y:2018:i:2:p:102-107
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    References listed on IDEAS

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    1. repec:bla:scandj:v:78:y:1976:i:2:p:229-48 is not listed on IDEAS
    2. Cumby, Robert E & Obstfeld, Maurice, 1981. "A Note on Exchange-Rate Expectations and Nominal Interest Differentials: A Test of the Fisher Hypothesis," Journal of Finance, American Finance Association, vol. 36(3), pages 697-703, June.
    3. Augustine C. Arize & Ioannis N. Kallianiotis & Ebere Ume Kalu & John Malindretos & Moschos Scoullis, 2017. "A Multitude of Econometric Tests: Forecasting the Dutsch Guilder," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(9), pages 94-101, September.
    4. Herbert G. Grubel, 1965. "Profits from Forward Exchange Speculation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 79(2), pages 248-262.
    5. Augustine C. Arize & Charles J. Berendt & Giuliana Campanelli Andreopoulos & Ioannis N. Kallianiotis & John Malindretos, 2017. "Foreign Currency Prognostication: Diverse Tests for Germany," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 8(3), pages 111-120, July.
    6. Donald S. Kemp, 1975. "A monetary view of the balance of payments," Review, Federal Reserve Bank of St. Louis, vol. 57(Apr), pages 14-22.
    7. Frenkel, Jacob A & Glyfason, Thorvaldur & Helliwell, John F, 1980. "A Synthesis of Monetary and Keynesian Approaches to Short-Run Balance-of-Payments Theory," Economic Journal, Royal Economic Society, vol. 90(359), pages 582-592, September.
    8. Arize, Augustine C. & Malindretos, John & Igwe, Emmanuel U., 2017. "Do exchange rate changes improve the trade balance: An asymmetric nonlinear cointegration approach," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 313-326.
    9. Magee, Stephen P, 1976. "The Empirical Evidence on the Monetary Approach to the Balance of Payments and Exchange Rates," American Economic Review, American Economic Association, vol. 66(2), pages 163-170, May.
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    Cited by:

    1. Ioannis N. Kallianiotis & Karen Bianchi & Augustine C. Arize & John Malindretos & Ikechukwu Ndu, 2020. "Financial Assets, Expected Return and Risk, Speculation, Uncertainty, and Exchange Rate Determination," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 3-30.

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    More about this item

    Keywords

    exchange rate determination; current account view; monetary approach; speed of adjustment; econometric testing; Keynesian view;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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