Empirical Economics

, Volume 10, Issue 3, pp 163–175 | Cite as

Buffer stocks, exchange rates and deviations from purchasing power parity

  • R. MacDonald
Article
  • 42 Downloads

Abstract

In this paper an extension of the Monetary Approach to the Exchange Rate reduced form is presented and estimated for four bilateral exchange rates with data from the recent floating experience. The extension incorporates two features: a more sophisticated modelling of money demand, using theCarr andDarby money demand specification, and allowing for deviations from purchasing power parity. The estimated results are supportive of our extended specification and we conclude by arguing that care should be taken in specifying the underlying structural relationships in asset reduced form exchange rate equations.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Adler, M., andB. Lehman: Deviations from Purchasing Power Parity in the Long Run. The Journal of Finance, XXXVIII, No. 5, 1983, 1471–1487.Google Scholar
  2. Artis, M.J., andM.K. Lewis: Monetary Control in the United Kingdom, Philip Allan, 1981.Google Scholar
  3. Bilson, J.F.O.: Rational Expectations and the Exchange Rate. In J.A. Frenkel and H.G. Johnson, Eds., The Economics of Exchange Rates, Adison-Wesley, 1978a, 75–96.Google Scholar
  4. —: The Monetary Approach to the Exchange Rate — Some Empirical Evidence. International Monetary Fund Staff Papers,25, 1978b, 48–75.Google Scholar
  5. Branson, W.H., H. Halttunnen, andP. Masson: Exchange Rates in the Short Run. European Economic Review,10, 1977, 395–402.Google Scholar
  6. Carr, J., andM.R. Darby: The Role of Money Supply Shocks in the Short Run Demand for Money. Journal of Monetary Economics,8, 1981, 183–199.CrossRefGoogle Scholar
  7. Chow, G.: On the Long,-Run and Short-Run Demand for Money. Journal of Political Economy,74, 1966, 111–131.CrossRefGoogle Scholar
  8. Darby, M.R.: The Allocation of Transitory Income Among Consumers' Assets. American Economic Review,62, 1974, 928–941.Google Scholar
  9. —: Rational Expectations Under Conditions of Costly Information. Journal of Finance,31, 1976, 889–895.Google Scholar
  10. Dornbusch, R.: Monetary Policy Under Exchange Rate Flexibility. In Managed Exchange Rate Flexibility: The Recent Experience, Federal Reserve Bank of Boston, 1979.Google Scholar
  11. Fair, R.C.: The Estimation of Simultaneous Equation Models with Lagged Endogenous Variables and First Order Serially Correlated Errors. Econometrica, 1970, 507–516.Google Scholar
  12. Feige, E.L., andD.K. Pearce: Economically Rational Expectations: Are Innovations in the Rate of Inflation Independent of Innovations in Measures of Monetary and Fiscal Policy? Journal of Political Economy,84, 499 – 572.Google Scholar
  13. Frankel, J.A.: On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials. American Economic Review, 1979a, 610 – 622.Google Scholar
  14. Frankel, J.: Monetary and Portfolio Balance Models of Exchange Rate Determination. In: Bhandari and Putnam (Eds), Economic Interdependence and Flexible Exchange Rates, 1983.Google Scholar
  15. Frenkel, J.A.: A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence. Scandinavian Journal of Economics,78, No. 2, 1976, 200–224.Google Scholar
  16. —: Flexible Exchange Rates, Prices, and the Role of ‘News‘: Lessons from the 1970s. Journal of Political Economy,89, No. 4, 1981a, 665–705.CrossRefGoogle Scholar
  17. —: The Collapse of Purchasing Power Parities During the 1970s. European Economic Review16, 1981b, 145–165.CrossRefGoogle Scholar
  18. Hacche, G., andJ. Townsend: Exchange Rates and Monetary Policy: Modelling Sterling's Effective Exchange Rate, 1972 – 80. In W.A. Eltis and P.J.N. Sinclair, The Money Supply and the Exchange Rate, Oxford, 1981, 201 - 247.Google Scholar
  19. Hodrick, R.J.: An Empirical Analysis of the Monetary Approach to the Determination of the Exchange Rate. In J.A. Frenkel and H.G. Johnson Eds., The Economics of Exchange Rates, Addison-Wesley, 1978.Google Scholar
  20. Hooper, P., andJ. Morton: Floating in the Dollar: A Model of Nominal and Real Exchange Rate Determination. International Finance Discussion Paper, No. 168, 1980.Google Scholar
  21. MacDonald, R.: Our Experience with Floating Exchange Rates: A Survey of the Empirical Evidence on Exchange Rate Models, News and Risk. Loughborough University Discussion Paper, No. 74, 1983.Google Scholar
  22. —: The Monetary Approach to the Exchange Rate Revisited. Applied Economics, 1984.Google Scholar
  23. Mussa, M.: The Exchange Rate, The Balance of Payments, and Monetary Policy Under a Regime of Controlled Floating. Scandinavian Journal of Economics, No. 78, 1976b, 229–248.Google Scholar
  24. —: Macroeconomic Interdependence and the Exchange Rate Regime. R. Dornbusch and J.A. Frenkel, Eds., International Economic Policy Theory and Evidence, John Hopkins, 1979, 160 – 208.Google Scholar

Copyright information

© Physica-Verlag 1985

Authors and Affiliations

  • R. MacDonald
    • 1
  1. 1.Department of Political EconomyUniversity of AberdeenAberdeen

Personalised recommendations