The monetary exchange rate model as a long-run phenomenon

Pure time series-based tests fail to find empirical support for monetary exchange rate models. In this paper we apply pooled time series estimation on a forward-looking monetary model, resulting in parameter estimates which are in compliance with the underlying theory. Based on a panel version of the Engle and Granger [Engle, R.F., Granger, C.W.J., 1987. Go-integration and error correction: representation, estimation and testing, Econometrica 55, 251-276] two-step procedure we find that the residuals of the panel-based estimated monetary model are stationary. This indicates that on a pooled time series level there is cointegration between the exchange rate and the macroeconomic fundamentals of this monetary model. (C) 2000 Elsevier Science BN. All rights reserved.