IDEAS home Printed from https://ideas.repec.org/p/hhs/rbnkwp/0213.html
   My bibliography  Save this paper

Using a New Open Economy Macroeconomics model to make real nominal exchange rate forecasts

Author

Listed:
  • Sellin, Peter

    () (Monetary Policy Department, Central Bank of Sweden)

Abstract

In this paper we undertake an out-of-sample evaluation of the ability of a model to forecast the Swedish Krona’s real and nominal effective exchange rate, using a cointegrating relation between the real exchange rate, relative output, terms of trade and net foreign assets (or alternatively the trade balance). The cointegrating relation is derived from a theoretical model of the New Open Economy Macroeconomics type. The forecasting performance of our estimated vector error correction model is quite good once the dynamics of the model have been augmented with an interest rate differential.

Suggested Citation

  • Sellin, Peter, 2007. "Using a New Open Economy Macroeconomics model to make real nominal exchange rate forecasts," Working Paper Series 213, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0213
    as

    Download full text from publisher

    File URL: http://www.riksbank.se/upload/Dokument_riksbank/Kat_publicerat/WorkingPapers/2007/wp213.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Lindblad, Hans & Sellin, Peter, 2003. "The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach," Working Paper Series 152, Sveriges Riksbank (Central Bank of Sweden).
    2. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-137, February.
    3. Philip R. Lane & Gian Maria Milesi-Ferretti, 2000. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," Working Papers 062000, Hong Kong Institute for Monetary Research.
    4. Jesper Lindé, 2004. "Swedish Postwar Business Cycles: Generated Abroad or at Home?," Scandinavian Journal of Economics, Wiley Blackwell, pages 623-645.
    5. Maurice Obstfeld & Kenneth Rogoff & Richard Clarida, "undated". "The Unsustainable U S Current Account Position Revisited," Working Paper 14901, Harvard University OpenScholar.
    6. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376 National Bureau of Economic Research, Inc.
    7. Philip Lane, 2007. "The Swedish external position and the krona," International Economics and Economic Policy, Springer, pages 263-279.
    8. Ron Alquist & Menzie D. Chinn, 2008. "Conventional and unconventional approaches to exchange rate modelling and assessment," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 2-13.
    9. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, pages 841-857.
    10. Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, pages 155-186.
    11. Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, pages 155-186.
    12. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External wealth, the trade balance, and the real exchange rate," European Economic Review, Elsevier, pages 1049-1071.
    13. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, pages 481-511.
    14. West, Kenneth D., 2006. "Forecast Evaluation," Handbook of Economic Forecasting, Elsevier.
    15. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
    16. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, pages 291-311.
    17. Philip Lane, 2007. "The Swedish external position and the krona," International Economics and Economic Policy, Springer, pages 263-279.
    18. Kristian Nilsson, 2004. "Do Fundamentals Explain the Behaviour of the Swedish Real Effective Exchange Rate?," Scandinavian Journal of Economics, Wiley Blackwell, pages 603-622.
    19. Bergvall, Anders, 2002. "What Determines Real Exchange Rates? The Nordic Countries," Working Paper Series 2002:15, Uppsala University, Department of Economics.
    20. Annika Alexius & Jonny Nilsson, 2000. "Real Exchange Rates and Fundamentals: Evidence from 15 OECD Countries," Open Economies Review, Springer, pages 383-397.
    21. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, pages 3-24.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    New Open Economy Macroeconomics; real exchange rate; nominal exchange rate; forecasting;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:hhs:rbnkwp:0213. 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: (Lena Löfgren) or (Benny Carlsson). General contact details of provider: http://edirc.repec.org/data/rbgovse.html .

    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 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.