This paper re-examines Dornbusch’s (1976) sticky-price monetary model to exchange rate determination by employing both conventional Johansen’s (1988, 1990, 1994) maximum likelihood cointegration test and the ARDL Bound test by Pesaran, Shin, and Smith (2001) for the monthly data of Taiwan over the period 1986:01 ∼ 2003:04. Ambiguous results are found for the long-run equilibrium relationship between the NTD/USD exchange rate and macro fundamentals. With the advantage that ARDL Bound test incorporates both I(1) and I(0) series, we conclude our empirical evidence that there is no long-run equilibrium relationship between exchange rates and macro fundamentals. Moreover, for the short-run dynamic response, the result from the ARDL-UECM-MAIC (1, 10, 10, 8, 10) setting supports the overshooting of currency depreciation as pre-described by Dornbusch (1976). However, this overshooting phenomenon does not exist the current month, but one month after.
Review of Quantitative Finance and Accounting 25(1), pp.55-71