Business Publications
Document Type
Article
Publication Date
6-1982
URL with Digital Object Identifier
https://doi.org/10.1007/978-1-349-17286-3_2
Abstract
In this paper we estimate and compare several alternative exchange rate models that have received wide attention, but little comparison, during the 1970s. In order to compare purchasing power parity (PPP), nominal interest rate parity, real interest rate parity, and portfolio balance models, we first strip each down to its essential core and undertake comparable single-equation tests of both 'har'd' and 'easy' (more and less constrained) versions of each model. We then embed each of the 'hard' versions in a new macroeconomic model of Canada, and assess their implications for the impacts of monetary and fiscal shocks. Using annual Canadian data from the 1950s and 1970s, all of the models have single—equation errors of about 3%, except for the 'hard' versions of PPP and real interest parity, which are heavily rejected by the data. In a macroeconomic context, the models have modestly different implications for the effects of fiscal shocks, and diverge more widely under monetary shocks.
Citation of this paper:
Helliwell J.F., Boothe P.M., Vuchelen J. (1983) Macroeconomic Implications of Alternative Exchange-Rate Models. In: De Grauwe P., Peeters T. (eds) Exchange Rates in Multicountry Econometric Models. Palgrave Macmillan, London
Notes
This is a National Bureau of Economic Research working paper (No. 904) as well as a chapter in Exchange Rates in Multicountry Econometric Models (1983).