A Comparison of Two Alternative Monetary Approaches to Exchange Rate Determination over the Long-Run

Year 2009, Volume: 1 Issue: 2, 63 - 76, 01.09.2009

Bruce Morley

Abstract

The aim of this paper is to compare the conventional monetary model of the exchange
rate with an alternative model, which incorporates a stock price measure and is based on
Friedman‟s money demand function. These models are then compared using data from
the UK, Canada and the USA, applying the Autoregressive Distributed Lag (ARDL)
Bounds testing approach and the Phillips-Hansen approaches to cointegration. Although
the results from the conventional monetary model are poor, the version which includes
stock prices produces evidence of a long-run relationship, which has more appropriate
long-run coefficients than the conventional model

Keywords

Exchange Rate, Stock Price, ARDL, Cointegration

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