The monetary approach to the exchange rate. Long-run relationships and coefficient restrictions

In this paper the monetary approach to the exchange rate is re-examined for three key currencies, using data for the recent experience with flexible exchange rates. Two important findings are reported in the paper. First, it is demonstrated, using a multivariate cointegration technique, that an unrestricted monetary model is a valid framework for analysing the long run exchange rate. Second, we find, inter alia, that the proportionality of the exchange rate to relative money supplies is valid for the German mark.