Nominal Exchange Rates and Monetary Fundamentals: Evidence from a Seventeen Country Panel

Abstract

We study the long-run relationship between nominal exchange rates and monetary fundamentals in a quarterly panel of 17 countries extending from 1973.1 to 1995.4. Our analysis is centered on two issues. First, we test whether exchange rates are cointegrated with long-run determinants predicted by economic theory. These results generally support the hypothesis of cointegration. The second issue is to re-examine the ability for monetary fundamentals to forecast future exchange rate returns. Panel regression estimates and forecasts confirm that this forecasting power is significant.