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Taylor rules and exchange rate predictability in emerging economies

  • Galimberti, Jaqueson K.
  • Moura, Marcelo L.

This study demonstrates the relationship between exchange rate determination and an endogenous monetary policy represented by Taylor rules. We fill a gap in the literature by focusing on a group of fifteen emerging economies that adopted free-floating exchange rates and inflation targeting beginning in the mid-1990s. Because of the limited span of the time series, which is a common obstacle to studying emerging economies, we employ panel data regressions to produce more efficient estimates. Following the recent literature, we use a robust set of out-of-sample statistics, incorporating bootstrapped and asymptotic distributions for the Diebold-Mariano statistic, the Clark and West statistic and Theil's U ratio. By evaluating different specifications for the Taylor rule exchange rate model based on their out-of-sample performances, we find that a present-value forward-looking specification shows strong evidence of exchange rate predictability.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 1008-1031

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:1008-1031
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