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

HKIMR Working Paper No. 12/2005

30 Pages Posted: 9 Feb 2004  

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance; University of California, Santa Cruz - Department of Economics; University of California at Santa Cruz - Department of Economics

Antonio I. Garcia Pascual

International Monetary Fund (IMF) - Western Hemisphere Department; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 4 versions of this paper

Date Written: July 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.

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

JEL Classification: F31, F47

Suggested Citation

Chinn, Menzie David and Cheung, Yin-Wong and Garcia Pascual, Antonio I., Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? (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. Available at SSRN: https://ssrn.com/abstract=318971 or http://dx.doi.org/10.2139/ssrn.318971

Menzie David Chinn (Contact Author)

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
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608-262-7397 (Phone)
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National Bureau of Economic Research (NBER)

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Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance ( email )

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Kowloon
Hong Kong

University of California, Santa Cruz - Department of Economics ( email )

435 Engineering 2
Santa Cruz, CA 95064
United States
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831-459-5077 (Fax)

University of California at Santa Cruz - Department of Economics ( email )

1156 High Street
Santa Cruz, CA 95064
United States

Antonio I. Garcia Pascual

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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