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Exchange Rate Equations Based on Interest Rate Rules : In-Sample and Out-of-Sample Performance (Faiz Kurallarina Dayali Doviz Kuru Denklemleri : Orneklem Ici ve Disi Performans)

Author

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  • Mahir Binici
  • Yin-Wong Cheung

Abstract

Using exchange rate data on five currencies vis-�-vis the US dollar, this paper examines the insample and out-of-sample performance of exchange rate equations derived from alternative empirical and optimal interest rate rules. These rules could have either homogeneous or heterogeneous response coefficients. Our exercise shows that these exchange rate equations do not offer good in-sample explanatory power consistently across currencies and over time. The relative forecasting performance of these exchange rate equations tend to vary across currencies and over time and bears limited relationship with the relative in-sample performance. When the forecast performance is compared with a random walk model, these exchange rate equations offer no better performance under the usual MSFE criterion but are better when the ability of predicting the direction of change is considered.

Suggested Citation

  • Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Equations Based on Interest Rate Rules : In-Sample and Out-of-Sample Performance (Faiz Kurallarina Dayali Doviz Kuru Denklemleri : Orneklem Ici ve Disi Performans)," Working Papers 1114, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  • Handle: RePEc:tcb:wpaper:1114
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2011/11-14
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    More about this item

    Keywords

    Taylor Rule; Exchange Rate Determination; Forecast Comparison; Mean Squared Forecast Error; Direction of Change;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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