A Test of Monetary and Portfolio Balance Models of Exchange Rate Determination

37 Pages Posted: 15 Feb 2006

See all articles by Daniel Gros

Daniel Gros

Centre for European Policy Studies, Brussels; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 2, 1986

Abstract

This paper tests whether the volatility in the fundamentals that ought to determine exchange rates is large enough to produce the observed volatility in exchange rates. The results show that monetary and portfolio balance considerations cannot explain the observed variability in the exchange rate of the deutsche mark vis-a-vis the U.S. dollar Japanese yen and Swiss franc. However monetary and portfolio balance considerations can explain the observed variability of the deutsche mark vis-a-vis other EMS currencies. This suggests that the EMS has been successful in reducing the exchange rate volatility to the minimum compatible with the volatility in the fundamentals.

Suggested Citation

Gros, Daniel, A Test of Monetary and Portfolio Balance Models of Exchange Rate Determination (October 2, 1986). IMF Working Paper No. 86/6, Available at SSRN: https://ssrn.com/abstract=884538

Daniel Gros (Contact Author)

Centre for European Policy Studies, Brussels ( email )

1 Place du Congres
B-1000 Brussels, 1000
Belgium

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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