This paper investigates the ability of the Dornbusch (1976) sticky- price model for the nominal metical-rand exchange rate, over the period 1994:1-2005:4 in explaining the exchange rate movements of Mozambique. Based on the model, we find that there is a stable relationship between the exchange rate and the fundamentals. Gross domestic product and inflation differentials between Mozambique and South Africa play the major roles in explaining the metical-rand exchange rate. However, when the Dornbusch (1976) model is re-estimated over the period of 1994:1-2003:4, and the out-of-sample forecast errors are compared with the atheoretical, Classical and Bayesian variants, of the Vector Autoregressive (VAR) and Vector Error Correction (VEC) models, and models capturing alternative forms of the Efficient Market Hypothesis (EMH) of exchange rates, the sticky-price model performs way poorer. Overall, the Bayesian VEC models (BVECMs), with relatively tight priors, are best suited for forecasting the metical-rand exchange rate, both in terms of out-of-sample forecasting and predicting turning points.
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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number
200702.
Find related papers by JEL classification: B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Quantitative and Mathematical C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models F31 - International Economics - - International Finance - - - Foreign Exchange E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
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