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Dynamic forecasting of monetary exchange rate models: Evidence from cointegration

Jae-Kwang Hwang ()

International Advances in Economic Research, 2001, vol. 7, issue 1, 64 pages

Abstract: The Frenkel-Bilson and Dornbusch-Frankel monetary exchange rate models are used to estimate the out-of-sample forecasting performance for the U.S. dollar/Canadian dollar exchange rate. By using Johansen's multivariate cointegration, up to three cointegrating vectors were found between the exchange rate and macroeconomic fundamentals. This means that there is a long-run relationship between the exchange rate and economic fundamentals. Based on error correction models, two monetary models outperform the random walk model at the three-, six-, and 12-month forecasting horizons. Therefore, monetary exchange rate models are still useful in forecasting exchange rates. Copyright International Atlantic Economic Society 2001

Date: 2001
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DOI: 10.1007/BF02296591

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