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Long-Run Econometric Modelling of Exchange Rates

  • Ronald MacDonald
  • Ian Marsh
Part of the Advanced Studies in Theoretical and Applied Econometrics book series (ASTA, volume 37)

Abstract

In this chapter we detail a progressive strategy for developing exchange rate models which incorporate long-run relationships and complex short-term dynamics. Our modelling strategy follows recent developments in the econometric literature, in particular, the work of Clements and Mizon (1991), Hendry and Mizon (1993), and Johansen (1988). Essentially, this process involves starting with a general VAR model specified in levels from which the cointegrating relationships are recovered, and then simplifying the full VAR structure until a parsimonious simultaneous system is obtained. The final set of linear simultaneous equations then incorporate both long-run relationships and short-run dynamics. We begin this chapter with a discussion of the motivation for system modelling. A process of moving from the general VAR (a prerequisite of the Johansen method) to the parsimonious system is then discussed in some detail, before we turn to empirical examples.

Keywords

Exchange Rate Interest Rate Real Exchange Rate Forecast Horizon Spot Exchange Rate 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media Dordrecht 1999

Authors and Affiliations

  • Ronald MacDonald
    • 1
  • Ian Marsh
    • 2
  1. 1.University of StrathclydeUK
  2. 2.City University Business SchoolUK

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