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Integration, cointegration and the forecast consistency of structural exchange rate models

  • Yin-Wong Cheung

    (University of California at Santa Cruz)

  • Menzie Chinn

Exchange rate forecasts are generated using some popular monetary models of exchange rates, in conjunction with several estimation techniques. We propose an alternative set of criteria for evaluating forecast rationality, which entails the following requirements: the forecast and the actual series i) have the same order of integration, ii) are cointegrated, and iii) have a cointegrating vector consistent with long run unitary elasticity of expectations. When these conditions hold, we consider the forecasts to be "consistent". These criteria appear to be more appropriate for forecasts generated by structural models than typical measures of forecast rationality, since such models rely upon serially correlated measures of the fundamentals.

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Paper provided by EconWPA in its series International Finance with number 9508002.

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Date of creation: 28 Aug 1995
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Handle: RePEc:wpa:wuwpif:9508002
Note: EXFCASTS.WP International Finance
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  28. Cheung, Yin-Wong, 1993. "Long Memory in Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 93-101, January.
  29. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February.
  30. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
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