TY - JOUR
T1 - Exchange rate predictability and a monetary model with time-varying cointegration coefficients
AU - Park, Cheolbeom
AU - Park, Sookyung
N1 - Funding Information:
We are grateful to an anonymous referee for valuable comments. We also thank seminar participants at Korea University and Kyung Hee University for helpful comments and discussions. Cheolbeom Park acknowledges that this work was supported by the National Research Foundation of Korea Grant funded by the Korean Government ( NRF-2012S1A5A8023577 ). However, all remaining errors are ours.
Copyright:
Copyright 2013 Elsevier B.V., All rights reserved.
PY - 2013
Y1 - 2013
N2 - Many studies have pointed out that the underlying relations and functions for the monetary model (e.g. the PPP relation, the money-demand function, monetary policy rule, etc.) have undergone parameter instabilities and that the relation between exchange rates and macro fundamentals is unstable due to the shift in the economic models in foreign exchange traders' views or the scapegoat effect in Bacchetta and van Wincoop (2009). Facing this, we consider a monetary model with time-varying cointegration coefficients in order to understand exchange rate movements. Weprovide statistical evidence against the standard monetary model with constant cointegration coefficients but find favorable evidence for the time-varying cointegration relationship between exchange rates and monetary fundamentals. Furthermore, we demonstrate that deviations between the exchange rate and fundamentals from the time-varying cointegration relation have strong predictive power for future changes in exchange rates through in-sample analysis, out-of-sample analysis, and directional accuracy tests.
AB - Many studies have pointed out that the underlying relations and functions for the monetary model (e.g. the PPP relation, the money-demand function, monetary policy rule, etc.) have undergone parameter instabilities and that the relation between exchange rates and macro fundamentals is unstable due to the shift in the economic models in foreign exchange traders' views or the scapegoat effect in Bacchetta and van Wincoop (2009). Facing this, we consider a monetary model with time-varying cointegration coefficients in order to understand exchange rate movements. Weprovide statistical evidence against the standard monetary model with constant cointegration coefficients but find favorable evidence for the time-varying cointegration relationship between exchange rates and monetary fundamentals. Furthermore, we demonstrate that deviations between the exchange rate and fundamentals from the time-varying cointegration relation have strong predictive power for future changes in exchange rates through in-sample analysis, out-of-sample analysis, and directional accuracy tests.
KW - Exchange rate
KW - Monetary model
KW - Predictability
KW - Time-varying cointegration
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U2 - 10.1016/j.jimonfin.2013.05.003
DO - 10.1016/j.jimonfin.2013.05.003
M3 - Article
AN - SCOPUS:84881527292
VL - 37
SP - 394
EP - 410
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
SN - 0261-5606
ER -