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Politics and exchange rate forecasts

  • Blomberg, S. Brock
  • Hess, Gregory D.

Standard exchange rate models perform poorly in out-of-sample forecasting when compared to the random walk model. We posit part of the poor performance of these models may be due to omission of political factors. We test this hypothesis by including political variables that capture party-specific, election-specific and candidate-specific characteristics. Surprisingly, we find our political model outperforms the random walk in out-of-sample forecasting at one to twelve month horizons for the pound/dollar, mark/dollar, pound/mark and the trade-weighted dollar, mark, and pound exchange rates.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 43 (1997)
Issue (Month): 1-2 (August)
Pages: 189-205

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Handle: RePEc:eee:inecon:v:43:y:1997:i:1-2:p:189-205
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  1. Alesina, Alberto & Roubini, Nouriel, 1992. "Political Cycles in OECD Economies," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 663-88, October.
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  18. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  19. Blomberg, S-B & Hess, G-D, 1995. "The Exchange Rate Politics Puzzle," Papers 95-14, Wellesley College - Department of Economics.
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