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Forecasting Exchange Rate from Combination Taylor Rule Fundamental

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  • Hyeyoen Kim
  • Doojin Ryu

Abstract

This study examines the forecasting performance of the Taylor rule on the exchange rate when there is uncertainty in the structural breaks in a small open economy. Using the combination window method, which considers the uncertainty of the size of the estimation window, we find that the out-of-sample forecasting performance of our approach is better than that of other benchmark models in the U.S. dollar-Korean won exchange rate. This finding indicates that the expected exchange rate is influenced by the capital mobility between small and large open economies, which is driven by the dynamic interactions of monetary policies between the two countries, and that the forecasting outcome is sensitive to the estimation window size and to whether or not the window reflects changes in the policy regime.

Suggested Citation

  • Hyeyoen Kim & Doojin Ryu, 2013. "Forecasting Exchange Rate from Combination Taylor Rule Fundamental," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(S4), pages 81-92, September.
  • Handle: RePEc:mes:emfitr:v:49:y:2013:i:s4:p:81-92
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    References listed on IDEAS

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    Cited by:

    1. Hyein Shim & Hyeyoen Kim & Sunghyun Kim & Doojin Ryu, 2016. "Testing the relative purchasing power parity hypothesis: the case of Korea," Applied Economics, Taylor & Francis Journals, vol. 48(25), pages 2383-2395, May.

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