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New evidence on nominal exchange rate predictability

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Author Info
Wu, Jyh-Lin
Hu, Yu-Hau
Abstract

The Meese-Rogoff puzzle, one of the well-known puzzles in international economics, concerns the weak relationship between nominal exchange rates and market fundamentals. The purpose of this paper is to show that market fundamentals do in fact matter in forecasting nominal exchange rates. In particular, we emphasize the importance of the Harrod-Balassa-Samuelson effect in modeling deviations from purchasing power parity. Based on the post-Bretton Woods period, we provide solid out-of-sample evidence that rejects the random walk forecast model at medium-term and long-term forecast horizons. We also find mild evidence for out-of-sample predictability of nominal exchange rates over the short term.

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File URL: http://www.sciencedirect.com/science/article/B6V9S-4V8G9XV-1/2/d9fb7b2b9b7a689c0da627d3680a39d8
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Publisher Info
Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 6 (October)
Pages: 1045-1063
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Handle: RePEc:eee:jimfin:v:28:y:2009:i:6:p:1045-1063

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Web page: http://www.elsevier.com/locate/inca/30443

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Related research
Keywords: Purchasing power parity Nominal exchange rates Real exchange rates Random walks Long-horizon regression tests;

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This page was last updated on 2009-12-13.


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