TY  - JOUR
AU  - Hakkio,Craig S.
TI  - Exchange Rate Determination and the Demand for Money
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 766
PY  - 1981
Y2  - September 1981
UR  - http://www.nber.org/papers/w0766
L1  - http://www.nber.org/papers/w0766.pdf
N1  - Author contact info:
Craig Hakkio
Federal Reserve Bank of Kansas City
925 Grand Avenue
Kansas City, MO  64198
E-Mail: craig.s.hakkio@kc.frb.org
AB  - This paper examines the conventional monetary equation of exchange rate determination. Under certain exogeneity conditions, one can write the price level, at home and abroad, as the ratio of the nominal money supply to the demand for real money balances. Then, since the exchange rate is the domestic price of foreign exchange, one can equate the exchange rate to the ratio of domestic to foreign prices. This then allows one to write, and estimate, the exchange rate as a function of the money supply differential, income differential and interest rate differential. If the domestic and foreign money demand errors are autocorrelated, and if deviations from purchasing power parity are autocorrelated, tests based on the above model may be invalid. Only if all autoregressive parameters are equal will test results be valid. A full information maximum likelihood procedure is used to estimate and test the assumptions necessary for the conventional procedure to be correct. Finally, two alternative models of exchange rate determination are considered to illustrate the importance of introducing the error terms at the beginning of the analysis.
ER  -