TESTING THE CANONICAL MODEL OF EXCHANGE-RATES WITH UNOBSERVABLE FUNDAMENTALS

Authors
GARDEAZABAL J REGULEZ A VAZQUEZ J
Citation
J. Gardeazabal et al., TESTING THE CANONICAL MODEL OF EXCHANGE-RATES WITH UNOBSERVABLE FUNDAMENTALS, International economic review, 38(2), 1997, pp. 389-404
Citations number
38
Categorie Soggetti
Economics
Journal title
International economic review → ACNP
ISSN journal
00206598
Volume
38
Issue
2
Year of publication
1997
Pages
389 - 404
Database
ISI
SICI code
0020-6598(1997)38:2<389:TTCMOE>2.0.ZU;2-2
Abstract
In this paper we test the asset market approach or canonical model of exchange rates. We treat exchange rate fundamentals as unobservable. T he empirical results do not reject the canonical model, and therefore the embedded rational expectations assumption, in sharp contrast with previous empirical evidence. We also find evidence of feedback from th e exchange rate to fundamentals, which is normally omitted in the theo retical literature.