Structural Models vs Random Walk: The Case of the Lira/$ Exchange Rate
After presenting the structural models of exchange-rate determination, the authors show that their out-of-sample predictive performance of the lira/$ exchange rate is inferior to that of the random walk model. Only by moving away from these single-equation, semireduced form models toward suitable economywide macroeconometric models can one hope to beat the random walk. Following this course, the authors show that the Mark V version of their continuous time macroeconometric model of the Italian economy outperforms both the existing structural models and the random-walk process in out-of-sample forecasting tests of the lira/$ exchange rate.
Volume (Year): 16 (1990)
Issue (Month): 2 (Apr-Jun)
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- Peter Isard, 1987. "Lessons from Empirical Models of Exchange Rates (Enseignements tirÃ©s des modÃ¨les empiriques de comportement des taux de change) (EnseÃ±anzas que nos brindan los modelos empÃricos de tipos de cambio," IMF Staff Papers, Palgrave Macmillan, vol. 34(1), pages 1-28, March.
- 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.
- Michael P. Dooley & Peter Isard, 1979. "The portfolio-balance model of exchange rates," International Finance Discussion Papers 141, Board of Governors of the Federal Reserve System (U.S.).
- Bilson, John F O, 1978. "The Current Experience with Floating Exchange Rates: An Appraisal of the Monetary Approach," American Economic Review, American Economic Association, vol. 68(2), pages 392-397, May.
- 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.
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