Ruhr Economic Papers

Ruhr Economic Papers #252

Cross-section Dependence and the Monetary Exchange Rate Model – A Panel Analysis

by Joscha Beckmann, Ansgar Belke and Frauke Dobnik

University of Duisburg-Essen, 04/2011, 30 S./p., 8 Euro, ISBN 978-3-86788-294-1

Abstract

This paper tackles the issue of cross-section dependence for the monetary exchange rate model in the presence of unobserved common factors using panel data from 1973 until 2007 for 19 OECD countries. Applying a principal component analysis we distinguish between common factors and idiosyncratic components and determine whether non-stationarity stems from international or national stochastic trends. We find evidence for a cross-section cointegration relationship between the exchange rates and fundamentals which is driven by those common international trends. In addition, the estimated coefficients of income and money are in line with the suggestions of the monetary model.

Published as:
Beckmann, J., A. Belke und F. Dobnik (2012), Cross-section Dependence and the Monetary Exchange Rate Model – A Panel Analysis. North American Journal of Economics and Finance 23: 38-53.

JEL-Classification: C32, C23, F31, F41

Keywords: Monetary exchange rate model; common factors; panel data; cointegration; vector error-correction models