Portfolio balance approach to exchange rate determination

Abstract

Neither the monetary approach nor the portfolio balance approach has led to robust estimates of models explaining changes in the market values of most currencies. Earlier tests showed that monetary models usually do not fair well, however recent studies have shown that the portfolio balance performed well. The purpose of this study is to test a model that can incorporate the monetary causes as well as the current account effects on exchange rates using the bilateral S$ against US$ rate. This study analyses the performance of reduced-form exchange rate models of the portfolio balance approach applied to the Singapore database.