Panel analysis of the monetary approach to exchange rates: Evidence from ten new EU members and Turkey

This paper presents empirical evidence which links the exchange rates to monetary variables in the newly entered ten EU members and Turkey. Using the panel version of various cointegration tests, we find a long-run relationship between nominal exchange rate and monetary variables such as monetary differential, output differential, interest rate differential and price differential. In addition, empirical evidence shows that our error-correction framework of the out-of-sample predictability outperforms random walk after two years.