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Evaluating Historical CGER Assessments: How Well Have they Predicted Subsequent Exchange Rate Movements?

  • Jungjin Lee
  • Abdul Abiad
  • Prakash Kannan

The IMF''s Consultative Group on Exchange Rate issues (CGER) has been conducting exchange rate assessments as part of the surveillance process since 1997. This paper evaluates CGER assessments from 1997 to 2006, by comparing these to subsequent movements in real effective exchange rates (REER). We find that CGER''s estimated misalignments have predictive power over future REER movements, especially over longer horizons and after changes in fundamentals are accounted for. But while CGER misalignments frequently predict the direction of currency movements correctly, misalignments have tended to be persistent, resulting in systematic errors-overprediction for undervalued currencies and underprediction for overvalued currencies.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/32.

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Length: 27
Date of creation: 01 Feb 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/32
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  1. Luca Antonio Ricci & Gian Maria Milesi‐Ferretti & Jaewoo Lee, 2013. "Real Exchange Rates and Fundamentals: A Cross‐Country Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 845-865, 08.
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  3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
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  5. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  6. Allan Timmermann, 2006. "An Evaluation of the World Economic Outlook Forecasts," IMF Working Papers 06/59, International Monetary Fund.
  7. Paul Cashin & Luis Felipe Céspedes & Ratna Sahay, 2003. "Commodity Currencies and the Real Exchange Rate," Working Papers Central Bank of Chile 236, Central Bank of Chile.
  8. Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269, March.
  9. Peter Isard & Hamid Faruqee, 1998. "Exchange Rate Assessment: Extension of the Macroeconomic Balance Approach," IMF Occasional Papers 167, International Monetary Fund.
  10. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
  11. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
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