The Exchange Rate Disconnect Puzzle Revisited

Abstract

A long-standing puzzle in the international macroeconomic literature has been the weak link between the theoretical foundations of the monetary approach to exchange rate determination and its empirical validity. This paper aims at filling this gap. We use a different econometric methodology; the Autoregressive Distributed Lag approach to cointegration, to show that exchange rates and fundamentals move together in the long-run, thus providing support to the monetary model. We also show that fundamentals Granger cause exchange rates, both in the short-run and the long-run.

Does Pak-Rupee Exchange Rate Respond to Monetary Fundamentals? A Structural Analysis

“…Katusiime, et al (2015) analyses the relation between Uganda Shilling/US$ and monetary fundamentals and finds that hybrid model provides support to analyse the Uganda Shilling/US$ exchange rates behaviors. Similarly, Bahmani-Oskooee, et al (2015) investigated the link between exchange rate and monetary factors for six countries, using the Autoregressive Distributed Lag (ARDL). This study found supportive evidence for the validity of monetary exchange rate model.…”

“…The ARDL model is considered to be superior over Johansen's (1995) cointegration test. The Johansen's test selected same lag order for all the variables, while ARDL can take different lags for different variables [Bahmani-Oskooee, et al (2015)]. This approach is directly applicable, irrespective of whether the variables are I(0), I(1) or mutually integrated.…”

Forecasting exchange rates for Central and Eastern European currencies using country‐specific factors

“…This could be the key issue explaining why many studies could not find a direct link between the fundamentals and exchange rates. Bahmani-Oskooee, Hosny, and Kishor (2015) showed that fundamentals Granger-cause exchange rates, both in the short run and long run. However, the relationship between the exchange rate and its fundamentals in the short run was not found to be very clear, especially in the era of high exchange rate volatility, where the spot exchange rate may be influenced by a number of other possibly unobserved variables.…”

Fundamentales macroeconómicos del tipo de cambio. Evidencia de cointegración

“…Este supuesto es crucial en el modelo, toda vez que, ante choques externos, los ajustes serán más rápidos en precios que en cantidades 2. La hipótesis de PPP plantea que el tipo de cambio y la relación de precios internos y externos deben presentar un comportamiento similar.…”