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Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?Menzie David ChinnUniversity of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER) Yin-Wong CheungCity University of Hong Kong - Department of Economics & Finance; University of California at Santa Cruz - Department of Economics Antonio I. Garcia PascualInternational Monetary Fund (IMF) - Western Hemisphere Department; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) July 2005 UC Santa Cruz Economics Working Paper No. 521; UC Santa Cruz International Economics Working Paper No. 02-16 HKIMR Working Paper No. 12/2005 Abstract: We re-assess exchange rate prediction using a wider set of models that have been proposed in the last decade: interest rate parity, productivity based models, and a composite specification. The performance of these models is compared against two reference specifications - purchasing power parity and the sticky price monetary model. The models are estimated in first-difference and error correction specifications, and model performance evaluated at forecast horizons of 1, 4 and 20 quarters, using the mean squared error, direction of change metrics, and the "consistency" test of Cheung and Chinn (1998). Overall, model/specification/currency combinations that work well in one period do not necessarily work well in another period.
Number of Pages in PDF File: 30 Keywords: exchange rates, monetary model, productivity, interest rate parity, behavioral equilibrium exchange rate model, forecasting performance JEL Classification: F31, F47 working papers seriesDate posted: February 9, 2004Suggested CitationContact Information
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