Predicting Sharp Depreciations in Industrial Country Exchange Rates

33 Pages Posted: 26 Feb 2007

See all articles by Jonathan H. Wright

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Joseph Gagnon

Peterson Institute

Date Written: November 2006

Abstract

This paper considers the prediction of large depreciations (both nominal and real) in a panel of industrialized countries using a probit methodology. The current account balance/GDP ratio has a modest but statistically significant effect on the estimated probability of a large depreciation, and gives slight predictive power in an out-of-sample forecasting exercise. The CPI inflation rate also has a modest but statistically significant effect in predicting nominal depreciations and has slight predictive power, but this effect is not present for real exchange rates. The GDP growth rate occasionally has a significant effect. A higher current account balance (surplus) tends to reduce the probability of a sharp depreciation; a higher inflation rate tends to increase the probability of a sharp depreciation; and a higher GDP growth rate perhaps tends to reduce the probability of a sharp depreciation.

Keywords: current account, forecasting

JEL Classification: C22, F31

Suggested Citation

Wright, Jonathan H. and Gagnon, Joseph, Predicting Sharp Depreciations in Industrial Country Exchange Rates (November 2006). FRB International Finance Discussion Paper No. 881, Available at SSRN: https://ssrn.com/abstract=964955 or http://dx.doi.org/10.2139/ssrn.964955

Jonathan H. Wright (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Joseph Gagnon

Peterson Institute ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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