Investigation of Engel-West explanation of Meese-Rogoff puzzle on Serbia-eurozone case: Lag augmented VAR approach

Petrović, Predrag and Nikolić, Goran (2018) Investigation of Engel-West explanation of Meese-Rogoff puzzle on Serbia-eurozone case: Lag augmented VAR approach. Zbornik Matice srpske za društvene nauke, 168 (4). pp. 821-834. ISSN 0352-5732

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Abstract

The study is dedicated to research of Engel-West explanation of Meese-Rogoff puzzle on Serbia-Eurozone case (2004:q4 – 2015:q2). The analysis was conducted by applying lag augmented VAR procedure (LA­VAR), which enables quite reliable testing of Granger causality when (some or all) time series are non-stationary without mandatory prior testing of cointegration and differencing thereof. The following Engel et al. [2005] investigation was carried out on bivariate and multivariate VAR models, taking into account five macro- economic fundamentals (money supply differential, inflation rate differential, interest rate differential, real GDP differential and interaction of money supply differential and real GDP differential). The obtained results demonstrate quite unconvincing indications about empirical validity of present-value exchange rate models, and do not confirm findings of Engel et al. [2005].

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