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Conventional and Unconventional Approaches to Exchange Rate Modeling and Assessment

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Author Info
Menzie D. Chinn
Ron Alquist

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Abstract

We examine the relative predictive power of the sticky price monetary model, uncovered interest parity, and a transformation of net exports and net foreign assets. In addition to bringing Gourinchas and Rey’s new approach and more recent data to bear, we implement the Clark and West (forthcoming) procedure for testing the significance of out-of-sample forecasts. The interest rate parity relation holds better at long horizons and the net exports variable does well in predicting exchange rates at short horizons in-sample. In out-of-sample forecasts, we find evidence that our proxy for Gourinchas and Rey’s measure of external imbalances outperforms a random walk at short horizons as do some of other models, although no single model uniformly outperforms the random walk forecast.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12481.

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Date of creation: Aug 2006
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Handle: RePEc:nbr:nberwo:12481

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation

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  1. Ardic, Oya Pinar & Ergin, Onur & Senol, G. Bahar, 2008. "Exchange Rate Forecasting: Evidence from the Emerging Central and Eastern European Economies," MPRA Paper 7505, University Library of Munich, Germany. [Downloadable!]
  2. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Juan Pedro Jensen Perdomo & Fernando Balbino Botelho, 2007. "Messe-Rogoff Revisitados: Uma Análise Empírica Das Projeções Para A Taxa De Câmbio No Brasil," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 038, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  4. Jaehun Chung & Yongmiao Hong, 2007. "Model-free evaluation of directional predictability in foreign exchange markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(5), pages 855-889. [Downloadable!]
  5. Philippe Bacchetta & Eric van Wincoop & Toni Beutler, 2009. "Can Parameter Instability Explain the Meese-Rogoff Puzzle?," Working Papers 09.04, Swiss National Bank, Study Center Gerzensee. [Downloadable!]
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  6. Menzie D. Chinn & Michael J. Moore, 2008. "Private Information and a Macro Model of Exchange Rates: Evidence from a Novel Data Set," NBER Working Papers 14175, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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