Empirical exchange rate models of the nineties : Are any fit to survive?

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)1150-1175
Journal / PublicationJournal of International Money and Finance
Volume24
Issue number7
Publication statusPublished - Nov 2005
Externally publishedYes

Abstract

We re-assess exchange rate prediction using a wider set of models that have been proposed in the last decade: interest rate parity, productivity based models, and a composite specification. 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 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. Integration, cointegration, and the forecast consistency of structural exchange rate models. Journal of International Money and Finance 17, 813-830]. Overall, model/specification/currency combinations that work well in one period do not necessarily work well in another period. © 2005 Elsevier Ltd. All rights reserved.

Research Area(s)

  • Exchange rates, Forecasting performance, Interest rate parity, Monetary model, Productivity, Purchasing power parity