Cross-Section Dependence and the Monetary Exchange Rate Model: A Panel Analysis

Joscha Beckmann, Ansgar Belke and Frauke Dobnik

No 1119, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper tackles the issue of cross-section dependence for the monetary exchange rate model in the presence of unobserved common factors using panel data from 1973 until 2007 for 19 OECD countries. Applying a principal component analysis we distinguish between common factors and idiosyncratic components and determine whether non-stationarity stems from international or national stochastic trends. We find evidence for a cross-section cointegration relationship between the exchange rates and fundamentals which is driven by those common international trends. In addition, the estimated coefficients of income and money are in line with the suggestions of the monetary model.

Keywords: Monetary exchange rate model; common factors; panel data; cointegration; vector error-correction models (search for similar items in EconPapers)
JEL-codes: C23 C32 F31 F41 (search for similar items in EconPapers)
Pages: 28 p.
Date: 2011
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Cross-section dependence and the monetary exchange rate model – A panel analysis (2012)
Working Paper: Cross-section Dependence and the Monetary Exchange Rate Mode – A Panel Analysis (2011)
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