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The long-run nominal exchange rate : specification and estimation issues

Weshah Razzak, Thomas Grennes

The authors use monthly data from May 1973 to December 1991 to estimate a textbook version of the monetary model of the nominal exchange rate determination. They use a modified version of the Phillips and Loretan (1991) Two-Sided Dynamic Least Squares. This method accounts for the serial correlation in the residuals, the simultaneity, and cointegration among the regressors. The latter condition is consistent with the restriction that the system is homogeneous of degree zero in the money supply differential and the exchange rate. Razzak and Grennes show that most of the empirical problems known to be associated with monetary models can be ameliorated.