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Taylor rules and exchange rate predictability in emerging economies

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  • Galimberti, Jaqueson K.
  • Moura, Marcelo L.

Abstract

This study demonstrates the relationship between exchange rate determination and an endogenous monetary policy represented by Taylor rules. We fill a gap in the literature by focusing on a group of fifteen emerging economies that adopted free-floating exchange rates and inflation targeting beginning in the mid-1990s. Because of the limited span of the time series, which is a common obstacle to studying emerging economies, we employ panel data regressions to produce more efficient estimates. Following the recent literature, we use a robust set of out-of-sample statistics, incorporating bootstrapped and asymptotic distributions for the Diebold-Mariano statistic, the Clark and West statistic and Theil's U ratio. By evaluating different specifications for the Taylor rule exchange rate model based on their out-of-sample performances, we find that a present-value forward-looking specification shows strong evidence of exchange rate predictability.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 1008-1031

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:1008-1031

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

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Keywords: Taylor rule exchange rate model; Forecasting; Emerging economies; Panel data; Bootstrap;

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Cited by:
  1. Jose Luiz Rossi Junior & Wilson Rafael de Oliveira Felicio, 2014. "Common Factors and the Exchange Rate: Results From the Brazilian Case," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 68(1), pages 49-71, April.
  2. Moura, Marcelo L. & Pereira, Fatima R. & Attuy, Guilherme de Moraes, 2013. "Currency Wars in Action: How Foreign Exchange Interventions Work in an Emerging Economy," Insper Working Papers wpe_304, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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