THE MONETARY MODEL OF EXCHANGE-RATES - EVIDENCE FROM THE CANADIAN FLOAT OF THE 1950S

This paper applies the Johansen cointegration technique to examine the validity of the monetary model of exchange rate determination as an e xplanation of the Canadian dollar-United States dollar relationship ov er the period of the Canadian float 1950-62. A single cointegrating ve ctor is identified whose coefficients conform in broad terms to the re strictions implied by the monetary model, thus lending support to the interpretation of the model as describing a long-run equilibrium relat ionship. This support is reinforced by the results derived from the as sociated error-correction model, which identify a clear short-run tend ency for the exchange rate to revert to the equilibrium value defined by the estimated long-run model.