The Monetary Exchange Rate Model and Stock Prices

The primary purpose of this paper is to examine the modified monetary models of exchange rate determination that consider the stock market. The empirical model is based on the ARDL bounds test on a monthly basis over the period 1990:03 to 2007:08. The results point to several conclusions as follows. Overall, we find evidence of stable long-run cointegration relationships among the variables tested. For the restricted version of the models, the difference in stock price indexes has a significant and negative impact on the short-run and long-run movements of exchange rate in the second sample period, unlike in the first sample period. Our finding suggests that the monetary model approach can be extended to contain equity markets as well as bond markets.