Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?
April 1, 2004
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Summary
We reassess exchange rate prediction using a wider set of models that have been proposed in the last decade. The performance of these models is compared against two reference specifications-purchasing power parity and the sticky-price monetary model. The models are estimated in first-difference and error-correction specifications, and model performance is evaluated at forecast horizons of 1, 4, and 20 quarters, using the mean squared error, direction of change metrics, and the "consistency" test of Cheung and Chinn (1998). Overall, model/specification/currency combinations that work well in one period do not necessarily work well in another period.
Subject: Exchange rate modelling, Exchange rates, Financial services, Foreign exchange, Interest rate modelling, Interest rate parity, Purchasing power parity
Keywords: dollar exchange rate movement, dollar-yen exchange rate, Exchange rate modelling, exchange rates, forecasting performance, Interest rate modelling, interest rate parity, interest rate parity model, monetary model, mover accent, MSE ratio, price level, productivity, purchasing power parity, random walk, two-step procedure, U.S. dollar, WP
Pages:
37
Volume:
2004
DOI:
Issue:
073
Series:
Working Paper No. 2004/073
Stock No:
WPIEA0732004
ISBN:
9781451849493
ISSN:
1018-5941
