Cointegration and models of exchange rate determination

The application of new techniques in testing for cointegration indicate the inappropriate- ness of the pure monetary model to explain movements in the nominal exchange rate. In general the fundamental variables are found to be integrated of different orders and there is a lack of cointegration between the exchange rate variables in the monetary model and relative prices. Estimation of other dynamic models are found to give rise to parameter estimates which do not support the monetary model. The results are broadly consistent across five countries. These results imply that it is not worthwhile to forecast from the monetary model and its main variants.