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Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge

Katarina Juselius

No 17-07, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: A theory-consistent CVAR scenario describes a set of testable regularieties one should expect to see in the data if the basic assumptions of the theoretical model are empirically valid. Using this method, the paper demonstrates that all basic assumptions about the shock structure and steady-state behavior of an an imperfect knowledge based model for exchange rate determination can be formulated as testable hypotheses on common stochastic trends and cointegration. This model obtained a remarkable support for almost every testable hypothesis and was able to adeqautely account for the long persistent swings in the real exchange rate.

Keywords: Theory-Consistent CVAR; Imperfect Knowledge; Theory-Based Expectations; International Puzzles; Long Swings; Persistence (search for similar items in EconPapers)
JEL-codes: F31 F41 G15 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm and nep-ore
Date: 2017-04-10
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