Exchange Rate Equations Based on Interest Rate Rules : In-Sample and Out-of-Sample Performance (Faiz Kurallarina Dayali Doviz Kuru Denklemleri : Orneklem Ici ve Disi Performans)
AbstractUsing exchange rate data on five currencies vis-à-vis the US dollar, this paper examines the insample and out-of-sample performance of exchange rate equations derived from alternative empirical and optimal interest rate rules. These rules could have either homogeneous or heterogeneous response coefficients. Our exercise shows that these exchange rate equations do not offer good in-sample explanatory power consistently across currencies and over time. The relative forecasting performance of these exchange rate equations tend to vary across currencies and over time and bears limited relationship with the relative in-sample performance. When the forecast performance is compared with a random walk model, these exchange rate equations offer no better performance under the usual MSFE criterion but are better when the ability of predicting the direction of change is considered.
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Bibliographic InfoPaper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1114.
Date of creation: 2011
Date of revision:
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Taylor Rule; Exchange Rate Determination; Forecast Comparison; Mean Squared Forecast Error; Direction of Change;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-15 (All new papers)
- NEP-CBA-2011-08-15 (Central Banking)
- NEP-FOR-2011-08-15 (Forecasting)
- NEP-MON-2011-08-15 (Monetary Economics)
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