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The predictability of real exchange rate changes in the short and long run

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Author Info

  • Cumby, Robert E.
  • Huizinga, John

Abstract

Nominal exchange rates do not move to offset differences in inflation rates on a month to month, quarter to quarter, or even year to year basis, resulting in sizable real exchange rate changes. Are these changes predictable? We address this question in three ways. First, we describe a variety of tests of predictability and explain how the different tests are related. Next, we implement the tests for the U.S. dollar relative to four currencies and find statistically significant evidence that real exchange rate changes are predictable. Finally, we examine whether the predictability is of an economically interesting magnitude.

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File URL: http://www.sciencedirect.com/science/article/B6VF1-45DMNC2-3/2/f6ad8e224d17703928192f8924969d02
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Bibliographic Info

Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 3 (1991)
Issue (Month): 1 (April)
Pages: 17-38

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Handle: RePEc:eee:japwor:v:3:y:1991:i:1:p:17-38

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Web page: http://www.elsevier.com/locate/inca/505557

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References

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  1. Cumby, Robert E. & Huizinga, John & Obstfeld, Maurice, 1983. "Two-step two-stage least squares estimation in models with rational expectations," Journal of Econometrics, Elsevier, vol. 21(3), pages 333-355, April.
  2. Ross Levine, 1988. "The forward exchange rate bias: a new explanation," International Finance Discussion Papers 338, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Balázs Égert, & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," William Davidson Institute Working Papers Series wp793, William Davidson Institute at the University of Michigan.
  2. Nikolaos Giannellis & Athanasios Papadopoulos, 2007. "Estimating the Equilibrium Effective Exchange Rate for Potential EMU Members," Open Economies Review, Springer, vol. 18(3), pages 307-326, July.
  3. Funke, Michael & Rahn, Jörg, 2004. "Just how undervalued is the Chinese renminbi?," BOFIT Discussion Papers 14/2004, Bank of Finland, Institute for Economies in Transition.
  4. Michael Funke & Jorg Rahn, 2004. "By How Much Is The Chinese Renminbi Undervalued?," Money Macro and Finance (MMF) Research Group Conference 2004 40, Money Macro and Finance Research Group.
  5. Clarida, R. & Gali, J., 1993. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," Discussion Papers 1993_25, Columbia University, Department of Economics.
  6. Mark, Nelson C. & Choi, Doo-Yull, 1997. "Real exchange-rate prediction over long horizons," Journal of International Economics, Elsevier, vol. 43(1-2), pages 29-60, August.
  7. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
  8. Rahn, Jörg, 2003. "Bilaterial equilibrium exchange rates of EU accession countries against the euro," BOFIT Discussion Papers 11/2003, Bank of Finland, Institute for Economies in Transition.
  9. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
  10. Chen, Son-Nan & Jeon, Kisuk, 1998. "Mean reversion behavior of the returns on currency assets," International Review of Economics & Finance, Elsevier, vol. 7(2), pages 185-200.
  11. Jörg Rahn, 2004. "Bilaterial equilibrium exchange rates of EU accession countries against the euro," Macroeconomics 0401010, EconWPA.

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