Econometrics (Apr 2022)

A Theory-Consistent CVAR Scenario for a Monetary Model with Forward-Looking Expectations

  • Katarina Juselius

DOI
https://doi.org/10.3390/econometrics10020016
Journal volume & issue
Vol. 10, no. 2
p. 16

Abstract

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A theory-consistent CVAR scenario describes a set of testable regularities capturing basic assumptions of the theoretical model. Using this concept, the paper considers a standard model for exchange rate determination with forward-looking expectations and shows that all assumptions about the model’s shock structure and steady-state behavior can be formulated as testable hypotheses on common stochastic trends and cointegration. The basic stationarity assumptions of the monetary model failed to obtain empirical support. They were too restrictive to explain the observed long persistent swings in the real exchange rate, the real interest rates, and the inflation and interest rate differentials.

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