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

Cheung, Yin-Wong; Chinn, Menzie David; Garcia Pascual, Antonio I.

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

IMF Working Paper No. 04/73

37 Pages Posted: 15 Feb 2006

See all articles by Yin-Wong Cheung

Yin-Wong Cheung

University of California, Santa Cruz - Department of Economics

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)

Antonio I. Garcia Pascual

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

There are 4 versions of this paper

Date Written: April 2004

Abstract

We reassess exchange rate prediction using a wider set of models that have been proposed in the last decade. The performance of these models is compared against two reference specificationspurchasing power parity and the sticky-price monetary model. The models are estimated in first-difference and error-correction specifications, and model performance is 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, purchasing power parity, forecasting performance

JEL Classification: F31, F47

Suggested Citation: Suggested Citation

Cheung, Yin-Wong and Chinn, Menzie David and Garcia Pascual, Antonio I., Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? (April 2004). IMF Working Paper No. 04/73, Available at SSRN: https://ssrn.com/abstract=878896