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Business
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10 / 2620 |
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TB and TB* represent the cumulated U.S. and foreign trade balances, and u is a disturbance term.
The exchange rate exhibits first degree homogeneity in the relative money supplies, i.e a1 = 1 for all the models. The Frenkel-Bilson model, which assumes purchasing power parity, constraints a4 = a5 = a6 = 0...
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The Frenkel-Bilson model, which assumes purchasing power parity, constraints a4 = a5 = a6 = 0. The Dornbusch-Frankel , which allows for slow domestic price adjustment and consequent deviations from PPP, set a5 = a6 = 0. The Hooper-Morton model which allows for changes in the long-run real exchange rate does not constrain any of the coefficients to be zero...
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