THE MONETARY MODEL OF THE EXCHANGE-RATE - LONG-RUN RELATIONSHIPS, SHORT-RUN DYNAMICS AND HOW TO BEAT A RANDOM-WALK

The monetary model is re-examined for the sterling-dollar exchange rat e. First, it is demonstrated, using a multivariate cointegration techn ique, that an unrestricted monetary model is a valid framework for ana lyzing the long-run exchange rate. Second, we find, once proper accoun t has been taken of the short-run data dynamics, that an unrestricted monetary model outperforms the random walk and other models in an out- of-sample forecasting contest.