Essay: Exchange Rate in the UK-Empirical Model
The empirical methodology or model approach to exchange rate determination in the UK’s sterling pound to the francs or dollar or yen, can be empirically examined using the cointegration method. The VEC (Cointegration and Vector Errorcorrection) (Dawson, Baillie 2007) is the vital applied principle in econometrics. In this regard, VEC principle of Cointegration method is the key components that predict the direction of transaction which means either home country or foreign country in that bilateral dealing. Secondly, money stock used by home country and is adjustable. Thirdly, it is the real income component depicted by the nation’s GDP as a measure of country’s output ((Rawson 200: 248); therefore its use in arriving at an empirical outcome, depicts the accuracy due to inclusion of key factors that determine exchange rates.
Cointegration Tests and Results
In examining the UK exchange rate determination empirically, in relation to the monetary model in its relation to exchange rate determination of other currencies relative to the sterling pound (James 1999 and Renson 2000), UK is regarded as home country while other currencies like USA or Japan or France are regarded as foreign countries. While the money stock that is available used for other countries and UK is adjusted seasonally.