Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the...
Transcript of Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the...
![Page 1: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/1.jpg)
Lecture 2:Monetary Models of the Exchange
Rate
Prof. Menzie ChinnKiel Institute for World Economics
March 7-11, 2005
![Page 2: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/2.jpg)
Lecture Outline• Flexible price monetary model
• PV model of flexible price monetary approach
• Sticky price formulation
• Dornbusch model
• An application: the USD/EUR rate
![Page 3: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/3.jpg)
I
The Flexible Price Monetary Model
![Page 4: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/4.jpg)
Derivation of the Flex Price Model
Assume UIP and rational expectations
Invoke PPP:
![Page 5: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/5.jpg)
Money demand functions in the two countries:
Combine with money market equilibrium:
![Page 6: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/6.jpg)
II
A PV model of the FPMA
![Page 7: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/7.jpg)
A Rat-Ex/PV Formulation
Assuming perfectly flexible prices, the Fisherian
model of interest rates should hold:
So it is assumed that real int. rate is constant
![Page 8: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/8.jpg)
Derivation (I)
Recall UIP and ex ante rel. PPP:
Hence the FPMA can be re-expressed as:
![Page 9: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/9.jpg)
Rearranging:
Imposing Rat-Ex:
substituting into the previous eqn:
![Page 10: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/10.jpg)
But note:
substituting iteratively:
![Page 11: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/11.jpg)
Conclusion: The current spot rate is the PDV of
the future stream of fundamentals, where
discount rate is the semi-elasticity of money
demand.
![Page 12: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/12.jpg)
Special Cases (I): AR(1)
Substituting into previous expression:
![Page 13: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/13.jpg)
Note: The relationship between the current spot
rate and current fundamentals will change if
either 8 or D (the driving process for the
fundamentals) change.
![Page 14: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/14.jpg)
Consider no autocorrelation, D=0:
If the fundamentals are a white noise processaround a mean, ::
![Page 15: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/15.jpg)
Special Cases (II): Random Walk The fundamentals:
Substitute D=1 into the PV equation
Current spot rate equals the current
fundamentals as all future fundamentals
![Page 16: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/16.jpg)
are expected to equal the current value.
Or set all the EtMt+i's equal to Mt in the PV
equation:
![Page 17: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/17.jpg)
What if the fundamentals follow a random walkwith drift?
Let:
![Page 18: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/18.jpg)
re-arranging:
Let
and
![Page 19: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/19.jpg)
subtracting this from the previous equation:
![Page 20: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/20.jpg)
“Magnification Effect”:
![Page 21: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/21.jpg)
Hold M constant,
change growth
rate:
![Page 22: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/22.jpg)
News
What moves asset prices? “News”
What is the actual exchange rate at time t?
What is the exchange rate expected at time t
based on time t information?
![Page 23: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/23.jpg)
What is the revision in the exchange rate?
![Page 24: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/24.jpg)
What is News?
Revisions in expectations in ( ).
For J=0, this is a “surprise”:
![Page 25: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/25.jpg)
Example: EUR/USD & CB Res.
![Page 26: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/26.jpg)
Application: USD/EUR bond yields
![Page 27: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/27.jpg)
III
The Sticky Price Monetary Model
![Page 28: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/28.jpg)
The Flex Price Model as the Long RunRecall:
Assume long run PPP:
![Page 29: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/29.jpg)
Assume flex price model applies in long run:
"Overshooting":
• 2 is the rate of reversion.
• If 2 = 0.5, 0.10 (10%) undervaluation induces a
0.05 (5%) exchange rate appreciation in the next
period.
![Page 30: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/30.jpg)
• "Rational Expectations"
By UIP:
Solving for s:
![Page 31: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/31.jpg)
![Page 32: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/32.jpg)
Substitute in the long run s:
This expression can be rewritten as:
![Page 33: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/33.jpg)
IV
The Dornbusch Model
![Page 34: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/34.jpg)
(1)
(2)
(3)
Consider UIP (where r is nominal, e is s):
Ad hoc model of exp’d depreciation:
![Page 35: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/35.jpg)
Solving for (p-m) and substituting in (1):
substituting in for x from equation (2):
rearranging yields (4);
![Page 36: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/36.jpg)
(4)
(5)
Solve for p - p- , noting the LR version of (4) is:
solve for 8r*
substitute this in for r* in (4):
![Page 37: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/37.jpg)
(6)
(7)
solving for e yields:
The domestic macroeconomy is described as:
![Page 38: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/38.jpg)
(8)
• ln(D/Y) is log excess demand
• (e-p) is the real exchange rate (since p* = 1)
• u is a fiscal shift parameter
One can solve for long run values of e and p by
setting p. =0, r = r*, in equation (8):
![Page 39: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/39.jpg)
(10)
Notice that (1) and (2) imply:
![Page 40: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/40.jpg)
but (6) implies a rel’n betw (e-e- ) and (p-p- ):
substituting into (8):
but equation (9) is an expression for e- ,
![Page 41: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/41.jpg)
where the last line is obtained by recalling from
(1), (2) and (6) that:
![Page 42: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/42.jpg)
(11)
Then one obtains (10) :
for the following expression (11) holding true:
![Page 43: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/43.jpg)
(12)
Solving (10) yields:
Substituting (12) into (6) yields:
but since
![Page 44: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/44.jpg)
(13)
and
![Page 45: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/45.jpg)
(14)
This result implies (14):
Hence the ad hoc expression for exchange rate
depreciation in (2) is equivalent to the perfect
foresight expression if:
![Page 46: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/46.jpg)
Using the quadratic formula, dropping the neg.
root:
![Page 47: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/47.jpg)
(15)
This yields (15):
![Page 48: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/48.jpg)
(4)
Convergence is faster (2 larger):
• the larger *, F, B are
• the smaller 8 is
Recall in (4):
implies for de- = dm = dp- , that:
![Page 49: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/49.jpg)
(16)
but dp/dm = 0 in the short run, due to sticky
prices:
substituting (15) into (16) yields (17):
![Page 50: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/50.jpg)
(17)
Degree of overshooting depends on 8 and the
rate of convergence to PPP. The more rapid the
convergence rate, the less overshooting.
![Page 51: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/51.jpg)
![Page 52: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/52.jpg)
The p. dot=0 line (combined goods and money
market equilibrium), is given by:
Notice in (17) as:
![Page 53: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/53.jpg)
• If output responds to AD/mon. shocks,
overshooting may be dampened.
• If 1-N:* < 0 then the exchange rate will
undershoot (where : = 1/(1-(), and ( is the
income elasticity of demand for domestic
goods).
![Page 54: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/54.jpg)
Time series of macro variables in Dornbusch Model
![Page 55: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/55.jpg)
Implications• Both the flex price and sticky price models try
to explain the volatility in exchange rates.
• In both models, exchange rates will be more
volatile than the fundamentals.
• The Dornbusch model illustrates one way to
get volatility: hold one variable constant, so
the other variable has to undertake all the
![Page 56: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/56.jpg)
adjustment (p fixed, e very flexible).
• A general principle in models. E.g. current
account and net foreign assets.
![Page 57: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/57.jpg)
V
An Application
![Page 58: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/58.jpg)
Johansen Cointegration Results: 1991M08-1999M12
Panel 2.1: Long Run Coefficients
[1] [2] [3] [4]
LR 158.0 136.8 162.4 133.4
c.v. 111.0[144.3] 103.2[134.2] 111.0[144.3] 103.2[134.1]
CR’s 2[1] 2[1] 3[1] 2[0]
mUS-meuro 0.396*** 0.396*** 0.687*** 0.658***
(0.086) (0.086) (0.088) (0.082)
yUS-yeuro -2.219*** -2.217*** -0.754** -0.703***
(0.478) (0.480) (0.291) (0.278)
iUS-ieuro 0.968 0.947 0.129 -0.084
(1.195) (0.556) (0.808) (0.791)
BUS-Beuro 10.797*** 10.881*** 13.626*** 13.542***
(2.302) (2.319) (3.181) (3.044)
T~ 2.057** 2.070** 1.323 1.268
(0.898) (0.902) (1.132) (1.082)
![Page 59: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/59.jpg)
![Page 60: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/60.jpg)
-.2
-.1
.0
.1
.2
1997 1998 1999 2000
S S S E Q E C M 9 1 9 8 S S E Q E C M 9 1 9 9
Ac tu a lE C M n o tre n d9 1 M 8 -9 8 M 1 2
E C M n o tre n d9 1 M 8 -9 9 M 1 2
Tracking the Euro
![Page 61: Lecture 2: Monetary Models of the Exchange Ratemchinn/lecture2.pdf · Monetary Models of the Exchange Rate ... • Flexible price monetary model • PV model of flexible price monetary](https://reader030.fdocuments.us/reader030/viewer/2022020204/5b77dd087f8b9ad2498d92ea/html5/thumbnails/61.jpg)