IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v24y2014i15p1017-1030.html
   My bibliography  Save this article

The equilibrium level and forecasting performance of nominal effective exchange rate indexes using an export and import price-based relative PPP model

Author

Listed:
  • Axel Grossmann
  • Chris Paul
  • Marc W. Simpson

Abstract

While the majority of studies on purchasing power parity (PPP) and exchange rate forecasting focus on bilateral exchange rates, the purpose of this article is to analyse the aggregate nominal effective exchange rate index of six major currencies. Export and import price indexes are used to construct relative PPP-based equilibrium exchange rates. Applying an alternative approach based on the exchange rate deviations from equilibrium, we find half-lives of less than 1 year in some cases. Additionally, we report success rates of correctly predicting the direction of the exchange rate indexes as high as 70%. The success rates improve for longer horizons and when the investigation is restricted to large deviations from PPP-equilibrium. Finally, and most importantly, for the period following the start of the global financial crisis (2007 to 2012), the model outperforms the random walk for four of the six exchange rate indexes. The findings provide important implications for international market participants who are interested in a general guide about a currencies aggregate equilibrium level as well its future movements.

Suggested Citation

  • Axel Grossmann & Chris Paul & Marc W. Simpson, 2014. "The equilibrium level and forecasting performance of nominal effective exchange rate indexes using an export and import price-based relative PPP model," Applied Financial Economics, Taylor & Francis Journals, vol. 24(15), pages 1017-1030, August.
  • Handle: RePEc:taf:apfiec:v:24:y:2014:i:15:p:1017-1030
    DOI: 10.1080/09603107.2014.922668
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/09603107.2014.922668
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. William Ellery Channing, 1994. "Change," American Journal of Economics and Sociology, Wiley Blackwell, vol. 53(1), pages 15-15, January.
    2. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
    3. MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:24:y:2014:i:15:p:1017-1030. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.