Essay: Empirical Research with regards to Exchange Rate in the UK

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Essay: Empirical Research with regards to Exchange Rate in the UK

Sample Essay

Rich body knowledge has been contributed by empirical Research conducted by other researchers like Wilford (1980); Haynes and Stone (1981); and Rogoff (1983), in their studies during the period of floating exchange rates to establish support for the model was not in favor of the model, since their evidence did not support the monetary model. While other category of researchers by Frankel, (1976); Billson, (1978); and Downburst, (1979). In their studies during the period of interwar and the periods of flexible exchange rates, the outcome of their results was largely supportive of the monetary mode. In an attempt to explain the reason for poor performance of the model, Rogoff and Meese, (1983); hypothesized that the reasons for poor performance of the model was due to the constraints imposed on relative monies, assumptions of purchasing power parity, incomes, exogeneity of money supply, uncovered interest rate parity, interest rates, and the statistical problems were some of the hindrance that were pointed out.

However the new approach to the model that incorporated the use and the development of the cointegration and error-correction statistical technique awakened the research into empirical examination of the monetary model. Despite the renewed anxiety and drive for research to determine the validity of the model, there was mixed results coming from different researchers. For instance, research by Engle and Granger (1987); through employing a two-step cointegration methodology came up with negative response in support for a long-run relationship between exchange rates and the set of monetary variables as projected by standard monetary model. These results by Engle and Granger resulted to a low morale and discouragement for further research. Hoper was found by the research that was conducted by Taylor and MacDonald in 1994, which they used multivariate method of Johansen and Juselius. The results of studies of Taylor and MacDonald supported that the model determine with precision the stylized facts of recent float because the residuals were I (0) (Gardner 2007; Huston 1969; Jonson 1999; James, 2008) and the point estimates are close to their a priori values.

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