Cross-Section Dependence and the Monetary Exchange Rate Model-A Panel Analysis
In: DIW Diskussionspapiere = Discussion Papers / Deutsches Institut für Wirtschaftsforschung (2011), No. 1109, pp. 1 - 28
2011article/chapter in journal
EconomicsFaculty of Business Administration and Economics » Economics » Macroeconomics
Title:
Cross-Section Dependence and the Monetary Exchange Rate Model-A Panel Analysis
Author:
Belke, AnsgarUDE
- GND
- 113316771
- LSF ID
- 47861
- ORCID
- 0000-0002-9743-4758
- Other
- connected with university
- LSF ID
- 49156
- Other
- connected with university
Year of publication:
2011
Abstract:
This paper tackles the issue of cross-section dependence for the monetary exchange rate model in the presence of unobserved common factors using panel data from 1973 until 2007 for 19 OECD countries. Applying a principal component analysis we distinguish between common factors and idiosyncratic components and determine whether non-stationarity stems from international or national stochastic trends. We find evidence for a cross-section cointegration relationship between the exchange rates and fundamentals which is driven by those common international trends. In addition, the estimated coecients of income and money are in line with the suggestions of the monetary model.