The out-of-sample forecasting performance of exchange rate models when coefficients are allowed to change
This study examines the out-of-sample forecasting performance of models of exchange rate determination without imposing the restriction that coefficients are fixed over time. Both fixed and variable coefficient versions of conventional structural models are considered, with and without a lagged dependent variable. While our results on fixed coefficient models support most of the Meese and Rogoff conclusions, we find that when coefficients are allowed to change, an important subset of conventional models of the dollar-pound, the dollar-deutsche mark, and the dollar-yen exchange rates can outperform forecasts of a random walk model. The structural models considered are the flexible-price (Frenkel-Bilson) and sticky-price (Dornbusch-Frankel) monetary models, and a sticky-price model which includes the current account (Hooper-Morton). We also find that the variable coefficient version of the Dornbusch-Frankel model with a lagged dependent variable generally predicts better than the other models considered including the random walk model.
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- Richard Meese & Kenneth Rogoff, 1983.
"The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?,"
NBER Chapters,in: Exchange Rates and International Macroeconomics, pages 67-112
National Bureau of Economic Research, Inc.
- Richard Meese & Kenneth Rogoff & Jacob Frenkel, "undated". "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," Working Paper 32044, Harvard University OpenScholar.
- Richard Meese & Kenneth S. Rogoff, 1982. "The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?," International Finance Discussion Papers 204, Board of Governors of the Federal Reserve System (U.S.).
- Hali J. Edison, 1983. "The rise and fall of sterling: testing alternative models of exchange rate determination," International Finance Discussion Papers 224, Board of Governors of the Federal Reserve System (U.S.).
- Swamy, P. A. V. B. & Tinsley, P. A., 1980. "Linear prediction and estimation methods for regression models with stationary stochastic coefficients," Journal of Econometrics, Elsevier, vol. 12(2), pages 103-142, February.
- P. A. V. B. Swamy & Peter A. Tinsley, 1976. "Linear prediction and estimation methods for regression models with stationary stochastic coefficients," Special Studies Papers 78, Board of Governors of the Federal Reserve System (U.S.).
- Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
- Hooper, Peter & Morton, John, 1982. "Fluctuations in the dollar: A model of nominal and real exchange rate determination," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 39-56, January.
- Hakkio, Craig, 1986. "Does the exchange rate follow a random walk? A Monte Carlo study of four tests for a random walk," Journal of International Money and Finance, Elsevier, vol. 5(2), pages 221-229, June.
- Finn, Mary G., 1986. "Forecasting the exchange rate: A monetary or random walk phenomenon?," Journal of International Money and Finance, Elsevier, vol. 5(2), pages 181-193, June.
- P. A. V. B. Swamy & Garry J. Schinasi, 1987. "Should fixed coefficients be reestimated every period," Special Studies Papers 213, Board of Governors of the Federal Reserve System (U.S.).
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
- Wolff, Christian C P, 1987. "Time-Varying Parameters and the Out-of-Sample Forecasting Performance of Structural Exchange Rate Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(1), pages 87-97, January.
- Makin, John H & Sauer, Raymond D, 1986. "Exchange Rate Determination with Changes in the Policy Regime: The Yen-Dollar Rate," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 164-169, February.
- Bilson, John F. O., 1979. "The deutsche mark/dollar rate : A monetary analysis," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 59-101, January.
- Somanath, V. S., 1986. "Efficient exchange rate forecasts: Lagged models better than the random walk," Journal of International Money and Finance, Elsevier, vol. 5(2), pages 195-220, June. Full references (including those not matched with items on IDEAS)
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