Monetary models of exchange rates and sweep programs


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 paper 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 sweepadjusted 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.

Divisions: College of Business and Social Sciences > Aston Business School > Economics, Finance & Entrepreneurship
Uncontrolled Keywords: sweep programs,forecasting,monetary models of exchange rates,
ISBN: 1-85449-639-5
Last Modified: 12 Feb 2024 08:04
Date Deposited: 11 Mar 2019 17:22
PURE Output Type: Working paper
Published Date: 2006-06
Authors: Binner, Jane
Bissoondeeal, Rakesh K. (ORCID Profile 0000-0003-3950-0507)
Elger, C. Thomas



Version: Published Version

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