Essay: Exchange Rate Determination in the UK
The paper has reappraised the empirical approach of the monetary model of exchange rate determination by employing the coitegration and VEC (vector error- correction). In determination of the exchange rate empirically, the model prove to be valid in long term due to its validity on the United Kingdom exchange rate determination. From the various scholarly writings and contributions to a wealthy body of knowledge it helps to relate and determine the pound exchange rate in relation other foreign currencies. The model applicability to determining the exchange rate for UK proves to be working but with few cautions that need to be taken into account. For instance, to research well on the model practicality long term data should be used.
Good data to be used should a quarterly data, semi yearly or yearly data since the model produces reliable and credible results in terms of long term calculation that reflect use of the monetary model as a long-run model of exchange rates. Using appropriate data help to eliminate unnecessary contention like the research conducted by 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. This was because they used weekly and monthly data to arrive at the outcomes of their findings.