Essay: Monetary Model of Exchange Rates in the UK

10 Oct

Essay: Monetary Model of Exchange Rates in the UK

Sample Essay

In regard to recent work on the model was that which was conducted in the year 1998 by Diamandis. Diamandis employed relatively a more sophisticated approach to the study by using multivariate unit root test, cointegration test and panel unit root test that found a tangible support for the monetary model of exchange rates. Furthermore, Diamandis suggested that unrestricted monetary model is and should be a valid framework for explaining the long-run movements of exchange rates.

To elaborate on the literature review, a lot has been covered by various scholars on the monetary model of the exchange rate in theUKandEuropeat large. Ranging from empirical studies during the flexible exchange rate periods, during the inter war periods (1970s) inEuropewas done by Fredrick (1968) and Huston (1969). While the study and research on floating exchange rates during the post war period was done by Davidson, (1998) and Granger, (2002). Who found that there were constraints imposed (Taylor, Lucio 2003) on relative interest rates, monies and incomes, in addition to assumptions of interest rate and purchasing power parity and exogeneity of money supply within Europe andUKincluded that lead to the unworthy performance of monetary models in relation to exchange rates determination. Up to the recent work by Diamandis that gave life to the monetary model through his supportive research outcome. The main reason for the high and intensity engagement in the research on the empirical test is all because the empirical monetary model of exchange rate is the most tested propositions in the country’s economic undertakings.

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