IDENTIFICATION AND ESTIMATION OF EXCHANGE RATE MODELS WITH UNOBSERVABLE FUNDAMENTALS∗

This article is concerned with issues of model specification, identification, and estimation in exchange rate models with unobservable fundamentals. We show that the continuous-time model proposed by Gardeazabal, Reg´ ulez, andV´azquez (International Economic Review 38 (1997), 389–404) is not identified and that this property is characteristic of the discrete-time representation of the model that they used as the basis for estimation by simulated method of moments.We briefly discuss the implications of this result in the context of the asset-market model of exchange rates with unobservable fundamentals.