PAPER PUSHERS OR PAPER MONEY - EMPIRICAL-ASSESSMENT OF FISCAL AND MONETARY MODELS OF EXCHANGE-RATE DETERMINATION

This paper documents the evidence in support of fiscal and monetary mo dels of exchange rates for the Canadian dollar, Deutschemark, Yen, and Pound over the 1974-1993 period. Cointegrating relationships between the real exchange rate and (i) fiscal impulses, and (ii) productivity and government spending, are estimated. Both Keynesian and neoclassica l fixed-factors fiscal models are found to have little substantiation in the data. When these fiscal models are converted to nominal form, t hey are found to have approximately the same predictive power as monet ary models, in-sample. While no model consistently and significantly o utperforms a random walk, the fiscal models do appear to outperform mo netary models in out-of-sample forecasting exercises. However, the imp rovement in forecast performance is seldom statistically significant. (C) Society for Policy Modeling, 1997