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Testing the Canonical Model of Exchange Rates with Unobservable Fundamentals

Author

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  • Gardeazabal, Javier
  • Regulez, Marta
  • Vazquez, Jesus

Abstract

In this paper, the authors test the asset market approach or canonical model of exchange rates. They treat exchange rate fundamentals as unobservable. The empirical results do not reject the canonical model and, therefore, the embedded rational expectations assumption, in sharp contrast with previous empirical evidence. The authors also find evidence of feedback from the exchange rate to fundamentals, which is normally omitted in the theoretical literature. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Gardeazabal, Javier & Regulez, Marta & Vazquez, Jesus, 1997. "Testing the Canonical Model of Exchange Rates with Unobservable Fundamentals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 389-404, May.
    • Handle: RePEc:ier:iecrev:v:38:y:1997:i:2:p:389-404
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    Cited by:

    1. Hans Dewachter & Dirk Veestraeten, 1999. "Measuring Convergence Speed of Asset Prices Toward a Pre-Announced Target," Working Papers of Department of Economics, Leuven ces9902, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    2. Jesus Vazquez, 2002. "Does the Lucas critique apply during hyperinflation?: empirical evidence from four hyperinflationary episodes," Applied Economics, Taylor & Francis Journals, vol. 34(11), pages 1389-1397.
    3. Leonardo Bartolini & Lorenzo Giorgianni, 2001. "Excess Volatility of Exchange Rates with Unobservable Fundamentals," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 518-530, August.
    4. Loría, Eduardo & Sánchez, Armando & Salgado, Uberto, 2010. "New evidence on the monetary approach of exchange rate determination in Mexico 1994-2007: A cointegrated SVAR model," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 540-554, April.
    5. Kalok Chan & Yiuman Tse & Michael Williams, 2011. "The Relationship between Commodity Prices and Currency Exchange Rates: Evidence from the Futures Markets," NBER Chapters, in: Commodity Prices and Markets, pages 47-71, National Bureau of Economic Research, Inc.
    6. Jesús Vazquez, 1995. "The relative importance of inflation and currency depreciation in the demand for money: an application of the estimation by simulation method to the German hyperinflation," Investigaciones Economicas, Fundación SEPI, vol. 19(2), pages 269-289, May.
    7. repec:bla:reviec:v:9:y:2001:i:3:p:518-30 is not listed on IDEAS
    8. Yiuman Tse, 2010. "The Relationship between Commodity Prices and Currency Exchange Rates: Evidence from the Futures Markets," Working Papers 0005, College of Business, University of Texas at San Antonio.

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