Working Paper: NBER ID: w2105
Authors: Ray C. Fair
Abstract: Since Meese and Rogoff's (1983) results, the view has become fairly widespread that structural models of exchange rates are not very good. There is, however, somewhat of a dichotomy in the literature between those who deal with small models, where the focus is almost exclusively on exchange rates, and those who deal with large macroeconometric models, where exchange rates make up only a small subset of the endogenous variables. Most of the emphasis has been on the first approach, and it may be that exchange rate determination within the context of large models has not been given a sufficient hearing. Exchange rate and interest rate equations are estimated and analyzed for 17 countries in this paper. This study is part of a larger project of constructing a multicountry econometric model. One of the aims of the paper is to see if the exchange rate equations that are part of my multicountry model also suffer from the Meese and Rogoff criticism. The results show that the view that structural exchange rate models are not very good may be too pessimistic.
Keywords: Interest Rates; Exchange Rates; Macroeconometric Models
JEL Codes: E43; F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Interest Rate (Country 1) (E43) | Currency Depreciation (Country 1) (F31) |
| Currency Depreciation (Country 1) (F31) | Demand for Foreign Bonds (Country 2) (G15) |
| Currency Depreciation (Country 1) (F31) | Demand for Domestic Bonds (Country 1) (F34) |
| Positive Price Shock (E31) | Currency Depreciation (Country 1) (F31) |
| Positive Price Shock (E31) | Decreased Demand for Exports (Country 1) (F14) |
| Positive Price Shock (E31) | Increased Demand for Imports (Country 1) (F14) |