Using recently developed model selection procedures, we determine that exchange rate returns are driven by a two-factor model. We identify them as a dollar factor and a euro factor. Exchange rates are thus driven by global, US, and Euro-zone stochastic discount factors. The identified factors...

We study the long-run relationship between nominal exchange rates and monetary fundamentals in a quarterly panel of 18 countries extending from 1973.1 to 1997.1. Our analysis is centered on two issues. First, we test whether exchange rates are cointegrated with long-run determinants predicted by...

Local asymptotic power advantages are available for testing the null hypothesis that the slope coefficient is zero in regressions of y(t+k)-y(t) on x(t) for k 1 where the x(t) and the change in y(t) are I(0) series. The advantages of these long-horizon regression tests accrue in a linear...

The within-group estimator (same as the least squares dummy variable estimator) of the dominant root in dynamic panel regression is known to be biased downwards. This paper studies recursive mean adjustment (RMA) as a strategy to reduce this bias for AR(p) processes that may exhibit...

The within-group estimator (same as the least squares dummy variable estimator) of the dominant root in dynamic panel regression is known to be biased downwards. This article studies recursive mean adjustment (RMA) as a strategy to reduce this bias for AR("p") processes that may exhibit...

Three potential sources of bias introduce complications for panel data estimation of the half-life of purchasing power parity deviations. They are bias induced by inappropriate cross-sectional aggregation of heterogeneous coefficients, small-sample estimation bias of dynamic lag coefficients,...