Abstract
This paper reports on an attempt to apply the asset-market model empirically to the U.S. dollar Deutsinemark exchange rate. In section 2 we outline the model of short-run exchange rate determination. In section 3 we extend the theory to include government reaction functions for both monetary policy and exchange-market intervention. Section 4 presents the empirical results on monthly data since 1971. Movements in the rate are related to movements in U.S. and German stocks of money and net foreign assets. Consistent results with a reaction function for intervention are also given. The estimates look reasonable and support the asset-market model. Finally, in section 5 we outline a framework for thinking about monetary and exchange-market policy.
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