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Title: |
Testing for Sunspots in the Foreign Exchange
Market |
| Author: |
Ryoo, Sangdai |
| Author
Affiliation: |
Bank of Korea |
| Source: |
International Economic Journal, Autumn 2002, v. 16, no. 3, pp. 39-58 |
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Publication Date: |
Autumn 2002 |
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Abstract: |
It has been
shown that the nonfundamental uncertainty called sunspots matters in
many areas of the economy. Noting the fact that nationwide capital
movement and the speculative demand for foreign currencies are rapidly
increasing, this paper conducts empirical tests on the sunspot exchange
rate model. The empirical result shows that the sunspot equilibrium
exchange rate deviating from Purchasing Power Parity (PPP) and Interest
Rate Parity (IRP) is consistent with the real data. More importantly,
the Generalized Method of Moments (GMM) over-identification test is
shown to support the evidence that more general Euler equations are in
favor of our sunspot equilibrium exchange rate model. |
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