Author(s)

Jean René Cupidon¹, Judex Hyppolite²

¹Department of Economics and Mathematics, Berea College, Berea, KY, USA.
²Department of Economics, Finance, and Real Estate, Monmouth University, West Long Branch, NJ, USA.

This paper presents an empirical investigation of an important series called “economic fundamentals” derived from the flexible price monetary model of exchange rate determination. The model predicts that the nominal exchange rate is determined by the “economic fundamentals”, referred here as the series f_t. As a result, the characteristics of the “economic fundamentals” process may influence the properties of the nominal exchange rate process. We will just use the term “fundamentals”. Nevertheless, many exchange rate models found in the literature assume an ad-hoc process for f_t ignoring the fact that the specification of this process can be formally derived within the framework of the monetary model. Using data for several countries on GDP and money supplies, we construct the series f_t according to the monetary model specification, and we examine some important characteristics of its empirical distribution such as skewness, kurtosis, stationarity, ARCH and GARCH properties. We observe that the series is not exactly normally distributed, as commonly assumed in many target zone models. This investigation essentially helps with modeling exchange rate and more importantly in the analysis of exchange rate target zones modeling by identifying potential restrictions that need to be taken into consideration when choosing a process for the modeling of the “economic fundamentals”.

Exchange Rates, Time Series

Cupidon, J. and Hyppolite, J. (2016) An Empirical Investigation of the Monetary Model Economic Fundamentals. Modern Economy, 7, 1728-1740. doi: 10.4236/me.2016.714151.