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How Much Simplification is Wise in Modelling Exchange Rates?

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Exchange Rates in Multicountry Econometric Models

Abstract

Simple models of the exchange rate generally do not give satisfaction in empirical work. We lack a standard and simple specification of the exchange rate which is dependable. The same set of equations usually yields substantially different results for different data samples, even with respect to sign, and our successful efforts tend to break down with the extension of the sample period. In these circumstances, it is important to examine the question of the minimum degree of sophistication that is wise in analysing exchange rates. My concern with this question should not imply, however, any brief in favour of complexity as such. My only objection to rudimentary models is that they do not work.1

I have benefited a lot from comments by Jean-Claude Milleron and André Orléan at INSEE and Dominique Lacoue-Labarthe at the University of Bordeaux.

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Authors
  1. Jacques Melitz
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  2. Robert Owen
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Editor information

Editors and Affiliations

  1. Catholic University of Leuven, Belgium

    Paul De Grauwe (Professor of Economics) & Theo Peeters (Professor of Economics) (Professor of Economics) &  (Professor of Economics)

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© 1983 Paul De Grauwe and Theo Peeters

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Melitz, J., Owen, R. (1983). How Much Simplification is Wise in Modelling Exchange Rates?. In: De Grauwe, P., Peeters, T. (eds) Exchange Rates in Multicountry Econometric Models. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-17286-3_1

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