TITLE:
An Empirical Investigation of the Monetary Model Economic Fundamentals
AUTHORS:
Jean René Cupidon, Judex Hyppolite
KEYWORDS:
Exchange Rates, Time Series
JOURNAL NAME:
Modern Economy,
Vol.7 No.14,
December
21,
2016
ABSTRACT: 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 ft. 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 ft 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 ft 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”.