Taylor Rule Exchange Rate Forecasting During the Financial Crisis
AbstractThis paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18330.
Date of creation: Aug 2012
Date of revision:
Publication status: published as Tanya Molodtsova & David H. Papell, 2013. "Taylor Rule Exchange Rate Forecasting during the Financial Crisis," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 55 - 97.
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Other versions of this item:
- Tanya Molodtsova & David H. Papell, 2012. "Taylor Rule Exchange Rate Forecasting during the Financial Crisis," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 55-97 National Bureau of Economic Research, Inc.
- Tanya Molodtsova & David H. Papell, 2013. "Taylor Rule Exchange Rate Forecasting during the Financial Crisis," NBER International Seminar on Macroeconomics, University of Chicago Press, University of Chicago Press, vol. 9(1), pages 55 - 97.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-03 (All new papers)
- NEP-CBA-2012-09-03 (Central Banking)
- NEP-FOR-2012-09-03 (Forecasting)
- NEP-MAC-2012-09-03 (Macroeconomics)
- NEP-MON-2012-09-03 (Monetary Economics)
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