Belke, Ansgar; Beckmann, Joscha; Dobnik, Frauke:

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

In: DIW Diskussionspapiere = Discussion Papers / Deutsches Institut für Wirtschaftsforschung, (2011) ; Nr. 1109, S. 1-28
ISSN: 1433-0210
Zeitschriftenaufsatz / Fach: Wirtschaftswissenschaften
Fakultät für Wirtschaftswissenschaften » Fachgebiet Volkswirtschaftslehre » Makroökonomik
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 coecients of income and money are in line with
the suggestions of the monetary model.