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The impact of uncertainty on professional exchange rate forecasts

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  • Beckmann, Joscha
  • Czudaj, Robert

Abstract

This paper analyzes the role of uncertainty on both exchange rate expectations and forecast errors of professionals for four major currencies based on survey data provided by FX4casts. We consider economic policy, macroeconomic, and financial uncertainty as well as disagreement among CPI inflation forecasters to account for different dimensions of uncertainty. Based on a Bayesian VAR approach, we observe that effects on forecast errors of professionals turn out to be more significant compared to the adjustment of exchange rate expectations. Our findings are robust to different forecasting horizons and point to an unpredictable link between exchange rates and fundamentals. Furthermore, we illustrate the importance of considering common unpredictable components for a large number of variables. We also focus on the post-crisis period and the relationship between uncertainty and disagreement among exchange rate forecasters and identify a strong relationship between them.

Suggested Citation

  • Beckmann, Joscha & Czudaj, Robert, 2016. "The impact of uncertainty on professional exchange rate forecasts," Ruhr Economic Papers 637, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
  • Handle: RePEc:zbw:rwirep:637
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. repec:eee:jimfin:v:74:y:2017:i:c:p:283-300 is not listed on IDEAS
    2. Joscha Beckmann & Robert L. Czudaj, 2018. "Monetary Policy Shocks, Expectations, And Information Rigidities," Economic Inquiry, Western Economic Association International, vol. 56(4), pages 2158-2176, October.
    3. repec:eee:finlet:v:27:y:2018:i:c:p:34-37 is not listed on IDEAS
    4. Haskamp, Ulrich, 2017. "Forecasting exchange rates: The time-varying relationship between exchange rates and Taylor rule fundamentals," Ruhr Economic Papers 704, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. Beckmann, Joscha & Czudaj, Robert, 2017. "Exchange rate expectations since the financial crisis: Performance evaluation and the role of monetary policy and safe haven," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 283-300.
    6. Kunze, Frederik, 2017. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," Center for European, Governance and Economic Development Research Discussion Papers 326, University of Goettingen, Department of Economics.

    More about this item

    Keywords

    Bayesian VAR; exchange rates; expectations; forecast; uncertainty;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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