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The Theory of Exchange Rate Determination, and Exchange Rate Forecasting

In: Open-Economy Macroeconomics

Author

Listed:
  • Giancarlo Gandolfo

    (University of Rome ‘La Sapienza’)

  • Pier Carlo Padoan

    (University of Urbino)

  • Giuseppe Arcangelis

    (University of Rome ‘La Sapienza’
    University of Michigan)

Abstract

The theory of exchange rate determination is in an unsatisfactory state. From the theoretical point of view the debates between the traditional flow approach and the modern asset-market approach have seen the victory of the latter. But from the empirical point of view the forecasting ability of the theoretical models remains very poor. The results of Meese and Rogoff (1983a, b) came as a shock to the profession. According to these studies, the current structural models of exchange-rate determination failed to outperform the random walk (RW) model in out-of-sample forecasting experiments even when the actual realised values of the explanatory variables were used (ex post forecasts). The results of Meese and Rogoff have been substantially confirmed in many subsequent papers, for example Alexander and Thomas (1987), but for a survey of the subsequent literature see Gandolfo, Padoan and Paladino (1990a, b).

Suggested Citation

  • Giancarlo Gandolfo & Pier Carlo Padoan & Giuseppe Arcangelis, 1993. "The Theory of Exchange Rate Determination, and Exchange Rate Forecasting," International Economic Association Series, in: Helmut Frisch & Andreas Wörgötter (ed.), Open-Economy Macroeconomics, chapter 18, pages 332-352, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-349-12884-6_18
    DOI: 10.1007/978-1-349-12884-6_18
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    Citations

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    Cited by:

    1. Daniela Federici & Giancarlo Gandolfo, 2011. "The Euro/Dollar Exchange Rate: Chaotic or Non-Chaotic?," CESifo Working Paper Series 3420, CESifo.
    2. Daniela Federici & Giancarlo Gandolfo, 2001. "Chaos and the exchange rate," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 11(2), pages 111-142.
    3. Ramos-Herrera, María del Carmen & Sosvilla-Rivero, Simón, 2023. "Economic growth and deviations from the equilibrium exchange rate," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 764-786.
    4. Giuseppe De Arcangelis & Giancarlo Gandolfo, 1996. "The Exchange Rate as a Nonlinear Economic Variable," Working Papers 36, Sapienza University of Rome, CIDEI.
    5. Federici, Daniela & Gandolfo, Giancarlo, 2012. "The Euro/Dollar exchange rate: Chaotic or non-chaotic? A continuous time model with heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 670-681.

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