Forecasting the Dollar/Euro Exchange Rate: Are International Parities Useful?
FEDEA Working Paper No. 2003-15
14 Pages Posted: 31 Jul 2003
Date Written: June 2003
In this paper we assess the empirical relevance of an expectations version of purchasing power parity in forecasting the Dollar/Euro exchange rate. This version is based on the differential of inflation expectations derived from inflation-indexed bonds for the Euro area and the USA.
Using the longest daily data a for both the Dollar/Euro exchange rate and for the inflation expectations, our results suggest that, with few exceptions, our predictors behave significantly better than a random walk in forecasts up to five days, both in terms of prediction errors and in directional forecast.
Keywords: Forecasting, Purchasing Power Parity, Exchange rates
JEL Classification: C53, F31
Suggested Citation: Suggested Citation