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New evidence on nominal exchange rate predictability

Listed author(s):
  • Wu, Jyh-Lin
  • Hu, Yu-Hau
Registered author(s):

    The Meese-Rogoff puzzle, one of the well-known puzzles in international economics, concerns the weak relationship between nominal exchange rates and market fundamentals. The purpose of this paper is to show that market fundamentals do in fact matter in forecasting nominal exchange rates. In particular, we emphasize the importance of the Harrod-Balassa-Samuelson effect in modeling deviations from purchasing power parity. Based on the post-Bretton Woods period, we provide solid out-of-sample evidence that rejects the random walk forecast model at medium-term and long-term forecast horizons. We also find mild evidence for out-of-sample predictability of nominal exchange rates over the short term.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0261-5606(08)00170-8
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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 28 (2009)
    Issue (Month): 6 (October)
    Pages: 1045-1063

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    Handle: RePEc:eee:jimfin:v:28:y:2009:i:6:p:1045-1063
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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