Prepared by Hossein Samiei.
See the articles in Choosing A Monetary Policy Target (ed. Ann Berit Christiansen and Jan Fredrik Qvigstad), 1997, Scandinavian University Press, for a discussion of issues involved.
See, among others, H. Faruqee, “Long-Run Determinants of the Real Exchange Rate: A Stock-Flow Perspective,” IMF Staff Papers, Vol 42 (March 1995); T. Feyzioglu, “Estimating The Equilibrium Exchange Rate: An Application to Finland,”, IMF Working Paper, WP/97/109, for a discussion of the determinants of the real exchange rate.
This procedure was also justified by the empirical results: the terms of trade, when included in the regressions, did not have a significant effect on the exchange rate.
These are in order of importance: Germany (19.8 percent), Sweden (18.0 percent), United Kingdom (12.9 percent), United States (9.4 percent), Denmark (6.5 percent), France (6.3 percent), Japan (5.3 percent), Netherlands (5.0 percent), Italy (5.0), Finland (4.0 percent), Belgium (2.8 percent), Switzerland (1.9 percent), Spain (1.8 percent), and Austria (1.3 percent).
See I. Harboe, S. Johansen, B. Nielsen, and A. Rahbek (1995), “Test for Cointegration Ranks in Partial Systems,” Preprint No. 5, Institute of Mathematical Statistics, University of Copenhagen; and M. H. Pesaran, Y. Shin, and R. J. Smith, “Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables,”, mimeo., University of Cambridge February 1997, for a description of how exogenous variables may be introduced in Johansen’s procedure.
See M. H. Pesaran and Y. Shin, “An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis,” mimeo., University of Cambridge, January 1997, for a discussion of this approach.
All estimations and testings were carried out using Microfit 4.0 for Windows.
In principle it is possible to test whether these restrictions are supported by the data. Given the relatively strong case for the restrictions, however, this is not attempted here.