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Macroeconomic Implications of Alternative Exchange Rate Models

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  • John F. Helliwell
  • Paul M. Boothe

Abstract

In this paper we estimate and compare several alternative exchange rate models that have received wide attention, but little comparison, during the 1970s. In order to compare purchasing power parity (PPP), nominal interest rate parity, real interest rate parity, and portfolio balance models, we first strip each down to its essential core and undertake comparable single-equation tests of both 'hard' and 'easy' (more and less constrained) versions of each model. We then embed each of the 'hard' versions in a new macroeconomic model of Canada, and assess their implications for the impacts of monetary and fiscal shocks. Using annual Canadian data from the 1950s and 1970s, all of the models have single-equation errors of about 3%, except for the 'hard' versions of PPP and real interest parity, which are heavily rejected by the data. In a macroeconomic context, the models have modestly different implications for the effects of fiscal shocks, and diverge more widely under monetary shocks.

Suggested Citation

  • John F. Helliwell & Paul M. Boothe, 1982. "Macroeconomic Implications of Alternative Exchange Rate Models," NBER Working Papers 0904, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0904
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    1. P. D. Jonson & W. J. McKibbin & R. G. Trevor, 1982. "Exchange Rates and Capital Flows: A Sensitivity Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 669-692, November.
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    7. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
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