Estimating Monetary Models of the Balance of Payments and Exchange Rates: A Bias

Predicting spot exchange rates in a nonlinear estimation framework using futures prices

“…In the early 1980s, work in this area seemed futile: Haynes and Stone (1981), Frankel (1984), and Backus (1984) concluded that estimates of the real interest rate differential could not explain in-sample exchangerate changes. Rasulo and Wilford (1980) and Haynes and Stone (1981) attribute the poor performance of the monetary approach to the constraints imposed on relative monies, income, and interest rates. Frankel (1982) provides an alternative explanation for the poor performance of the monetary models.…”

Tests of different monetary aggregates for the monetary models of the exchange rate in five ASEAN countries

“…However, later studies by Rasulo and Wilford (1980); Haynes and Stone (1981) and Driskill and Sheffrin (1981) employing data beyond 1978 have led to results, which are unsupportive of the theory. Nevertheless, by employing cointegration techniques, studies by MacDonald and Taylor (1991Taylor ( , 1993Taylor ( , 1994a; Diamandis and Kouretas (1996); Kouretas (1997); Reinton and Ongena (1999); Hwang (2001) and Tawadros (2001) have found evidence for the long-run validity of the model as well as its outof-sample forecasting performance.…”

Monetary models of exchange rates and sweep programs

“…These restrictions are generally not imposed for theoretical reasons but to reduce multicollinearity (Haynes and Stone, 1981). Rasulo and Wilford (1980) show that if the relevant elasticities are not identical, such constraints introduce a serious bias that affects all the coefficients in the monetary models of exchange rates. Also, Haynes and Stone (1981) highlight that such restrictions are problematic in the sense the specification bias which results from them can lead to sign reversal in the constrained coefficient.…”