The predictive power of the monetary model of exchange rate determination

Abstract

This study examines the predictive power of the monetary model of exchange rate determination for the Australian dollar vis-à-vis the US dollar exchange rate. Using a cointegration-based error-correction model, it is found that an unrestricted dynamic monetary model outperforms the random walk model at all forecasting horizons, with the degree of improvement increasing as the forecasting horizon is extended.

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