The importance of interest rates for forecasting the exchange rate
AbstractThis study compares the forecasting performance of a structural exchange rate model that combines the purchasing power parity condition with the interest rate differential in the long run, with some alternative models. The analysis is applied to the Norwegian exchange rate. The long run equilibrium relationship is embedded in a parsimonious representation for the exchange rate. The structural exchange rate representation is stable over the sample and outperforms a random walk in an out-of-sample forecasting exercise at one to four horizons. Ignoring the interest rate differential in the long run, however, the structural model no longer outperforms a random walk.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 340.
Date of creation: Feb 2003
Date of revision:
Equilibrium real exchange rate; cointegration VAR; out-of-sample forecasting;
Other versions of this item:
- Håvard Hungnes & Hilde C. Bj�rnland, 2006. "The importance of interest rates for forecasting the exchange rate," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(3), pages 209-221.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-04 (All new papers)
- NEP-CBA-2003-06-04 (Central Banking)
- NEP-FIN-2003-06-04 (Finance)
- NEP-IFN-2003-06-04 (International Finance)
- NEP-RMG-2003-06-04 (Risk Management)
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