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Forecasting the nominal exchange rate movements in a changing world. The case of the U.S. and the U.K

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  • David Alan Peel
  • Pantelis Promponas

Abstract

Exchange rate forecasting has become an arena for many researchers the last decades while predictability depends heavily on several factors such as the choice of the fundamentals, the econometric model and the data form. The aim of this paper is to assess whether modelling time-variation and other forms of instabilities may improve the forecasting performance of the models. Paper begins with a brief critical review of the recently developed exchange rate forecasting models and continues with a real-time forecasting race between our fundamentals-based models, a DSGE model, estimated with Bayesian techniques and the benchmark random walk model without drift. Results suggest that models accounting for non-linearities may generate poor forecasts relative to more parsimonious and linear models.

Suggested Citation

  • David Alan Peel & Pantelis Promponas, 2016. "Forecasting the nominal exchange rate movements in a changing world. The case of the U.S. and the U.K," Working Papers 144439514, Lancaster University Management School, Economics Department.
  • Handle: RePEc:lan:wpaper:144439514
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    More about this item

    Keywords

    Forecasting exchange rate; Exchange rate literature; Instability; Taylor rule; PPP; UIP; Money supply; Real-time estimation; Time-Varying models; DSGE model; Bayesian methods;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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