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Monetary models of exchange rates and sweep programs

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  • Rakesh Bissoondeeal
  • Jane Binner
  • Thomas Elger

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.

Suggested Citation

  • Rakesh Bissoondeeal & Jane Binner & Thomas Elger, 2009. "Monetary models of exchange rates and sweep programs," Applied Financial Economics, Taylor & Francis Journals, vol. 19(14), pages 1117-1129.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:14:p:1117-1129
    DOI: 10.1080/09603100802375501
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    References listed on IDEAS

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    1. Carlo Altavilla, 2008. "The (UN-) stable relationship between the exchange rate and its fundamentals," Applied Economics Letters, Taylor & Francis Journals, vol. 15(7), pages 539-544.
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    Cited by:

    1. Pope, Robin & Selten, Reinhard & Kaiser, Johannes & Kube, Sebastian & von Hagen, Jürgen, 2007. "The damage from clean floats: From an anti-inflationary monetary policy," Bonn Econ Discussion Papers 19/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    2. Pope, Robin & Selten, Reinhard & Kube, Sebastian & von Hagen, Jürgen, 2009. "Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency," Bonn Econ Discussion Papers 26/2009, University of Bonn, Bonn Graduate School of Economics (BGSE).
    3. Rakesh K. Bissoondeeal & Michail Karoglou & Alicia M. Gazely, 2011. "Forecasting The Uk/Us Exchange Rate With Divisia Monetary Models And Neural Networks," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(1), pages 127-152, February.

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