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Using a New Open Economy Macroeconomics model to make real nominal exchange rate forecasts

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Author Info
Sellin, Peter () (Monetary Policy Department, Central Bank of Sweden)
Abstract

In this paper we undertake an out-of-sample evaluation of the ability of a model to forecast the Swedish Krona’s real and nominal effective exchange rate, using a cointegrating relation between the real exchange rate, relative output, terms of trade and net foreign assets (or alternatively the trade balance). The cointegrating relation is derived from a theoretical model of the New Open Economy Macroeconomics type. The forecasting performance of our estimated vector error correction model is quite good once the dynamics of the model have been augmented with an interest rate differential.

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Publisher Info
Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 213.

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Length: 32 pages
Date of creation: 01 Oct 2007
Date of revision:
Handle: RePEc:hhs:rbnkwp:0213

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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Related research
Keywords: New Open Economy Macroeconomics; real exchange rate; nominal exchange rate; forecasting;

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
F31 - International Economics - - International Finance - - - Foreign Exchange

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lindblad, Hans & Sellin, Peter, 2003. "The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach," Working Paper Series 152, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  2. Maurice Obstfeld & Kenneth Rogoff, 2005. "The unsustainable U.S. current account position revisited," Proceedings, Federal Reserve Bank of San Francisco, issue Feb. [Downloadable!]
    Other versions:
  3. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February. [Downloadable!] (restricted)
  4. Jesper Lindé, 2004. "Swedish Postwar Business Cycles: Generated Abroad or at Home?," Scandinavian Journal of Economics, Blackwell Publishing, vol. 106(4), pages 623-645, December. [Downloadable!] (restricted)
  5. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
  6. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, 02. [Downloadable!] (restricted)
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  7. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  8. West, Kenneth D., 2006. "Forecast Evaluation," Handbook of Economic Forecasting, Elsevier. [Downloadable!] (restricted)
  9. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
  10. Lane, Philip R., 2006. "The Swedish External Position and the Krona," Working Paper Series 200, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  11. Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 155-186. [Downloadable!] (restricted)
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  12. Kristian Nilsson, 2004. "Do Fundamentals Explain the Behaviour of the Swedish Real Effective Exchange Rate?," Scandinavian Journal of Economics, Blackwell Publishing, vol. 106(4), pages 603-622, December. [Downloadable!] (restricted)
  13. Annika Alexius & Jonny Nilsson, 2000. "Real Exchange Rates and Fundamentals: Evidence from 15 OECD Countries," Open Economies Review, Springer, vol. 11(4), pages 383-397, October. [Downloadable!] (restricted)
  14. Kenneth D. West & Todd Clark, 2006. "Approximately Normal Tests for Equal Predictive Accuracy in Nested Models," NBER Technical Working Papers 0326, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Philip R. Lane & Gian Maria Milesi-Ferretti, 2001. "External Wealth, the Trade Balance, and the Real Exchange Rate," Trinity Economics Papers 200121, Trinity College Dublin, Department of Economics. [Downloadable!]
    Other versions:
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