The monetary model of exchange rate determination: the case of Greece (1974?1994)

The flexible-price monetary model is examined for the Greek drachma-US dollar exchange rate. The Johansen multivariate technique of co-integration is applied to an unrestricted form of the monetary model. Using quarterly data covering the period 1974?1994, strong evidence is found in favour of the existence of co-integration between the nominal exchange rate, relative money supply, relative income and relative interest rates. The monetary model is validated as a long-run equilibrium condition.