We evaluate the ability of a measure of external imbalances that combines the trade and the financial channels to forecast the real effective exchange rate for Chile. By making use of a quarterly database of external assets and liabilities for the period 1983 to 2005, and employing a recently developed test of out-of-sample predictive ability, we show that this measure is able to predict the real exchange rate at horizons of up to 2 years. Out-of-sample evidence of predictability tends to get stronger as the size of the window used to estimate the parameters increases. This is probably because of the greater relative importance of the external balance in the dynamics of the exchange rate in the last few years, or because of the increasing precision of parameter estimates with the sample size. When we break down our measure of external imbalances into its three components: exports to imports ratio, exports to assets ratio and assets to liabilities ratio, we find that out-of-sample predictability is mainly driven by the last two ratios.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Did you know? Each page is provided with a technical contact, in case something is not right with the supplied information. See under "publisher info".