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The predictability of real exchange rate changes in the short and long run

  • Cumby, Robert E.
  • Huizinga, John

Nominal exchange rates do not move to offset differences in inflation rates on a month to month, quarter to quarter, or even year to year basis, resulting in sizable real exchange rate changes. Are these changes predictable? We address this question in three ways. First, we describe a variety of tests of predictability and explain how the different tests are related. Next, we implement the tests for the U.S. dollar relative to four currencies and find statistically significant evidence that real exchange rate changes are predictable. Finally, we examine whether the predictability is of an economically interesting magnitude.

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File URL: http://www.sciencedirect.com/science/article/B6VF1-45DMNC2-3/2/f6ad8e224d17703928192f8924969d02
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Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 3 (1991)
Issue (Month): 1 (April)
Pages: 17-38

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Handle: RePEc:eee:japwor:v:3:y:1991:i:1:p:17-38
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505557

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  1. Cumby, Robert E. & Huizinga, John & Obstfeld, Maurice, 1983. "Two-step two-stage least squares estimation in models with rational expectations," Journal of Econometrics, Elsevier, vol. 21(3), pages 333-355, April.
  2. Robert E. Cumby & Maurice Obstfeld, 1984. "International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence," NBER Chapters, in: Exchange Rate Theory and Practice, pages 121-152 National Bureau of Economic Research, Inc.
  3. Ross Levine, 1988. "The forward exchange rate bias: a new explanation," International Finance Discussion Papers 338, Board of Governors of the Federal Reserve System (U.S.).
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