Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?

UC Santa Cruz Economics Working Paper No. 521; UC Santa Cruz International Economics Working Paper No. 02-16

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 12/2005

Journal of International Money and Finance, Vol. 24, No. 7, 2005

30 Pages Posted: 9 Feb 2004 Last revised: 8 Aug 2022

Multiple version iconThere are 4 versions of this paper

Date Written: July 1, 2005

Abstract

This working paper was written by Yin-wong Cheung (University of California, Santa Cruz), Menzie D. Chinn (University of Wisconsin and NBER) and Antonio Garcia-Pascual (International Monetary Fund and University of Munich).

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.

Keywords: exchange rates, monetary model, productivity, interest rate parity, behavioral equilibrium exchange rate model, forecasting performance

JEL Classification: F31, F47

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? (July 1, 2005). UC Santa Cruz Economics Working Paper No. 521; UC Santa Cruz International Economics Working Paper No. 02-16, Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 12/2005, Journal of International Money and Finance, Vol. 24, No. 7, 2005, Available at SSRN: https://ssrn.com/abstract=318971 or http://dx.doi.org/10.2139/ssrn.318971

Hong Kong Institute for Monetary and Financial Research (Contact Author)

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