How Much Simplification is Wise in Modelling Exchange Rates?

Jacques Melitz and Robert Owen

Chapter 1 in Exchange Rates in Multicountry Econometric Models, 1983, pp 1-20 from Palgrave Macmillan

Abstract: Abstract Simple models of the exchange rate generally do not give satisfaction in empirical work. We lack a standard and simple specification of the exchange rate which is dependable. The same set of equations usually yields substantially different results for different data samples, even with respect to sign, and our successful efforts tend to break down with the extension of the sample period. In these circumstances, it is important to examine the question of the minimum degree of sophistication that is wise in analysing exchange rates. My concern with this question should not imply, however, any brief in favour of complexity as such. My only objection to rudimentary models is that they do not work.1

Keywords: Exchange Rate; Interest Rate; Purchase Power Parity; Foreign Exchange Market; Flexible Exchange Rate (search for similar items in EconPapers)
Date: 1983
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DOI: 10.1007/978-1-349-17286-3_1

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