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On Fundamentals And Exchange Rates: A Casselian Perspective

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  • Ronald MacDonald
  • Ian W. Marsh

Abstract

Using an expanded version of the purchasing-power-parity condition we construct simultaneous equation models for three key exchange rates which incorporate meaningful long-run equilibrium relationships and complex short-run dynamics. We show that fully dynamic out-of-sample forecasts from these models are capable of significantly outperforming those of a random walk model over horizons as short as 3 months, and that they are also more accurate than the vast majority of professional forecasts. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 79 (1997)
Issue (Month): 4 (November)
Pages: 655-664

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Handle: RePEc:tpr:restat:v:79:y:1997:i:4:p:655-664

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  1. Engel, Charles, 1994. "Can the Markov switching model forecast exchange rates?," Journal of International Economics, Elsevier, Elsevier, vol. 36(1-2), pages 151-165, February.
  2. Chinn, Menzie D. & Meese, Richard A., 1995. "Banking on currency forecasts: How predictable is change in money?," Journal of International Economics, Elsevier, Elsevier, vol. 38(1-2), pages 161-178, February.
  3. Jeffrey A. Frankel and Andrew K. Rose., 1995. "A Survey of Empirical Research on Nominal Exchange Rates," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C95-051, University of California at Berkeley.
  4. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, American Finance Association, vol. 38(5), pages 1471-87, December.
  5. Davutyan, Nurhan & Pippenger, John, 1985. "Purchasing Power Parity Did Not Collapse during the 1970's," American Economic Review, American Economic Association, American Economic Association, vol. 75(5), pages 1151-58, December.
  6. Francis X. Diebold & Javier Gardeazabal & Kamil Yilmaz, 1993. "On cointegration and exchange rate dynamics," Working Papers 93-2, Federal Reserve Bank of Philadelphia.
  7. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, Elsevier, vol. 34(1-2), pages 181-192, February.
  8. Cumby, Robert E. & Modest, David M., 1987. "Testing for market timing ability : A framework for forecast evaluation," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(1), pages 169-189, September.
  9. Clements, Michael P. & Mizon, Grayham E., 1991. "Empirical analysis of macroeconomic time series : VAR and structural models," European Economic Review, Elsevier, Elsevier, vol. 35(4), pages 887-917, May.
  10. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, Elsevier, vol. 60(1-2), pages 203-233.
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