The Predictability of Real Exchange Rate Changes in the Short and Long Run
Nominal exchange rates do not move to offset differences in inflation rates on a month to month, quarter to quarter, or even year to year basis, resulting in sizable real exchange rate changes. Are these changes predictable? We address this question in three ways. First, we describe a variety of tests of predictability and explain how the different tests are related. Next, we implement the tests for the U.S. dollar relative to four currencies and find statistically significant evidence that real exchange rate changes are predictable. Finally, we examine whether the predictability is of an economically interesting magnitude.
|Date of creation:||Oct 1990|
|Publication status:||published as Japan and the World Economy, Volume 3, pp. 17-38, 1991|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Robert E. Cumby & Maurice Obstfeld, 1982. "International Interest-Rate and Price-Level Linkages Under Flexible Exchange Rates: A Review of Recent Evidence," NBER Working Papers 0921, National Bureau of Economic Research, Inc.
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