Long Run Exchange Rate Determination II

The work of Baillie and Selover (1987), Boothe and Glassman (1987) and the previous chapter takes into account the nonstationarity of some of the variables involved in the monetary models. In this context, the equations of exchange rate determination derived from the monetary models are thought of as long-run relationships. From this point of view, deviations of the exchange rate from a linear combination of its fundamentals are stationary, or in other words, they are cointegrated. The methodology used in those studies is that developed by Engle and Granger (1987). The results obtained in all three studies reject the specification of the monetary approach.