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Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?

Author

Listed:
  • Yin-Wong Cheung

    (University of California, Santa Cruz)

  • Menzie D. Chinn

    (University of Wisconsin and NBER)

  • Antonio Garcia-Pascual

    (International Monetary Fund and University of Munich)

Abstract

We re-assess exchange rate prediction using a wider set of models that have been proposed in the last decade: interest rate parity, productivity based models, and a composite specification. The performance of these models is compared against two reference specifications - purchasing power parity and the sticky price monetary model. The models are estimated in first-difference and error correction specifications, and model performance evaluated at forecast horizons of 1, 4 and 20 quarters, using the mean squared error, direction of change metrics, and the "consistency" test of Cheung and Chinn (1998). Overall, model/specification/currency combinations that work well in one period do not necessarily work well in another period.

Suggested Citation

  • Yin-Wong Cheung & Menzie D. Chinn & Antonio Garcia-Pascual, 2005. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Working Papers 122005, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:122005
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    More about this item

    Keywords

    exchange rates; monetary model; productivity; interest rate parity; purchasing power parity; forecasting performance;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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