Nominal exchange rates and monetary fundamentals - Evidence from a small post-Bretton woods panel

We study the long-run relationship between nominal exchange rates and monet ary fundamentals in a quarterly panel of 19 countries extending from 1973.1 to 1997.1. Our analysis is centered on two issues. First, we test whether exchange rates are cointegrated with long-run determinants predicted-by eco nomic theory. These results generally support the hypothesis of cointegrati on. The second issue is to re-examine the ability for monetary fundamentals to forecast future exchange rate returns. Panel regression estimates and p anel-based forecasts confirm that this forecasting power is significant. (C ) 2001 Elsevier Science B.V. All rights reserved.