International Journal of Business and Economics Volume 5, No. 2 August, 2006

The Monetary Model of the Dollar-Yen Exchange Rate Determination: A Cointegration Approach

M. Faizul Islam

Department of Management Studies, Southeastern University, U.S.A.

Mohammad S. Hasan

Faculty of Organisation and Management, Sheffield Hallam University, U.K.

Abstract

This paper validates the monetary model in the determination of the dollar-yen exchange rate by applying cointegration methodology. Estimation results indicate a stationary relationship between the dollar-yen exchange rate and monetary models, with long-term causality flowing from monetary variables to the dollar-yen exchange rate. The forecasting performance of the monetary model based on the error-correction model outperforms random walk models.

Keywords：cointegration, error-correction model, exchange rate, monetary model, random walk model.

JEL Classifications：F31, F41.

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