Macroeconomic Implications of Alternative Exchange Rate Models

John Helliwell and Paul M. Boothe

No 904, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we estimate and compare several alternative exchange rate models that have received wide attention, but little comparison, during the 1970s. In order to compare purchasing power parity (PPP), nominal interest rate parity, real interest rate parity, and portfolio balance models, we first strip each down to its essential core and undertake comparable single-equation tests of both 'hard' and 'easy' (more and less constrained) versions of each model. We then embed each of the 'hard' versions in a new macroeconomic model of Canada, and assess their implications for the impacts of monetary and fiscal shocks. Using annual Canadian data from the 1950s and 1970s, all of the models have single-equation errors of about 3%, except for the 'hard' versions of PPP and real interest parity, which are heavily rejected by the data. In a macroeconomic context, the models have modestly different implications for the effects of fiscal shocks, and diverge more widely under monetary shocks.

Date: 1982-06
Note: ITI IFM
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Published as Helliwell, John F. and Paul M. Boothe. "Macroeconomic Implications of Alternative Exchange Rate Models." Exchange Rates in Multicountry Economic Models, edited by P. De Grauwe and T. Peeters. London, Macmillan, (1983) , pp. 21-53.
Published as Princeton Studies in International Finance, No. 54, 1984

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