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Structural Models vs Random Walk: The Case of the Lira/$ Exchange Rate

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  • Giancarlo Gandolfo

    (University of Rome, La Sapienza)

  • Pietro Carlo Padoan

    (University of Urbino)

  • Giovanna Paladino

    (University of Rome, La Sapienza)

Abstract

After presenting the structural models of exchange-rate determination, the authors show that their out-of-sample predictive performance of the lira/$ exchange rate is inferior to that of the random walk model. Only by moving away from these single-equation, semireduced form models toward suitable economywide macroeconometric models can one hope to beat the random walk. Following this course, the authors show that the Mark V version of their continuous time macroeconometric model of the Italian economy outperforms both the existing structural models and the random-walk process in out-of-sample forecasting tests of the lira/$ exchange rate.

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File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume16/V16N2P101_113.pdf
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Bibliographic Info

Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 16 (1990)
Issue (Month): 2 (Apr-Jun)
Pages: 101-113

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Handle: RePEc:eej:eeconj:v:16:y:1990:i:2:p:101-113

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  1. Bilson, John F O, 1978. "The Current Experience with Floating Exchange Rates: An Appraisal of the Monetary Approach," American Economic Review, American Economic Association, American Economic Association, vol. 68(2), pages 392-97, May.
  2. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  3. Somanath, V. S., 1986. "Efficient exchange rate forecasts: Lagged models better than the random walk," Journal of International Money and Finance, Elsevier, Elsevier, vol. 5(2), pages 195-220, June.
  4. Peter Isard, 1987. "Lessons from Empirical Models of Exchange Rates (Enseignements tirés des modèles empiriques de comportement des taux de change) (Enseñanzas que nos brindan los modelos empíricos de tipos d," IMF Staff Papers, Palgrave Macmillan, vol. 34(1), pages 1-28, March.
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Cited by:
  1. Reinhold Heinlein & Hans-Martin Krolzig, 2011. "Effects of monetary policy on the $/£ exchange rate. Is there a 'delayed overshooting puzzle'?," Studies in Economics, Department of Economics, University of Kent 1124, Department of Economics, University of Kent.
  2. Manish KUMAR, 2009. "Exploiting The Information Of Stock Market To Forecast Exchange Rate Movements," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 56, pages 563-575, November.

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