The Monetary Model of Exchange Rates and Cointegration: Estimation, Testing and Prediction

These notes draw from the Theory of Cointegration in order to test the monetary model of exchange rate determination.
Previous evidence shows that the monetary model does not capture the short run dynamics of the exchange rate,
specially when assessed in terms of forecasting accuracy.
Even though the monetary equations of exchange rate determination may be bad indicators of how exchange rates are determined in the short run, they couldstill describe long run equilibrium relationships between t...