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919
Empirical exchange rate models of the Seventies: do they fit out of sample?
- JOURNAL OF INTERNATIONAL ECONOMICS
, 1983
"... This study compares the out-of-sample forecasting accuracy of various structural and time series exchange rate models. We find that a random walk model performs as well as any estimated model at one to twelve month horizons for the dollar/pound, dollar/mark, dollar/yen and trade-weighted dollar exch ..."
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Cited by 854 (12 self)
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This study compares the out-of-sample forecasting accuracy of various structural and time series exchange rate models. We find that a random walk model performs as well as any estimated model at one to twelve month horizons for the dollar/pound, dollar/mark, dollar/yen and trade-weighted dollar exchange rates. The candidate structural models include the flexible-price (Frenkel-Bilson) and sticky-price (Dornbusch-Frankel) monetary models, and a sticky-price model which incorporates the current account (Hooper-Morton). The structural models perform poorly despite the fact that we base their forecasts on actual realized values of future explanatory variables.
The forward discount anomaly and the risk premium: A survey of recent evidence
- JOURNAL OF EMPIRICAL FINANCE
, 1996
"... Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward ..."
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Cited by 400 (11 self)
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Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward discount. Properties of the expected forward forecast error are reviewed. Issues such as the relation of uncovered interest parity to real interest parity, and the implications of uncovered interest parity for cointegration of various quantities are discussed. The modeling and testing for risk premiums is surveyed. Included in this area are tests of the consumption CAPM, tests of the latent variable model, and portfolio-balance models of risk premiums. General equilibrium models of the risk premium are examined and their empirical implications explored. The survey does not cover the important areas of learning and peso problems, tests of rational expectations based on survey data, or the models of irrational expectations and speculative bubbles.
Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?
, 2000
"... The central puzzle in international business cycles is that real exchange rates are volatile and persistent. The most popular story for real exchange rate fluctuations is that they are generated by monetary shocks interacting with sticky goods prices. We quantify this story and find that it can acco ..."
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Cited by 343 (6 self)
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The central puzzle in international business cycles is that real exchange rates are volatile and persistent. The most popular story for real exchange rate fluctuations is that they are generated by monetary shocks interacting with sticky goods prices. We quantify this story and find that it can account for some of the observed properties of real exchange rates. When prices are held fixed for at least one year, risk aversion is high and preferences are separable in leisure, the model generates real exchange rates that are as volatile as in the data. The model also generates real exchange rates that are persistent, but less so than in the data. If monetary shocks are correlated across countries, then the comovements in aggregates across countries are broadly consistent with those in the data. Making asset markets incomplete or introducing sticky wages does not measurably change the results.
The New Open Economy Macroeconomics: A Survey”,
- Journal of International Economics
, 2001
"... Abstract Since the 1995 publication of Obsteld and Rogoff's Redux model, there has been an outpouring of research on open-economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities. This paper offers an interim survey of this recent literature. ..."
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Cited by 311 (4 self)
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Abstract Since the 1995 publication of Obsteld and Rogoff's Redux model, there has been an outpouring of research on open-economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities. This paper offers an interim survey of this recent literature.
Order Flow and Exchange Rate Dynamics
, 1999
"... Macroeconomic models of nominal exchange rates perform poorly. In sample, R 2 statistics as high as 10 percent are rare. Out of sample, these models are typically out-forecast by a naïve random walk. This paper presents a model of a new kind. Instead of relying exclusively on macroeconomic determina ..."
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Cited by 303 (23 self)
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Macroeconomic models of nominal exchange rates perform poorly. In sample, R 2 statistics as high as 10 percent are rare. Out of sample, these models are typically out-forecast by a naïve random walk. This paper presents a model of a new kind. Instead of relying exclusively on macroeconomic determinants, the model includes a determinant from the field of microstructure-order flow. Order flow is the proximate determinant of price in all microstructure models. This is a radically different approach to exchange rate determination. It is also strikingly successful in accounting for realized rates. Our model of daily exchange-rate changes produces R 2 statistics above 50 percent. Out of sample, our model produces significantly better short-horizon forecasts than a random walk. For the DM/ $ spot market as a whole, we find that $1 billion of net dollar purchases increases the DM price of a dollar by about 1 pfennig. eScholarship provides open access, scholarly publishing services to the University of California and delivers a dynamic
FIXING EXCHANGE RATES: A Virtual Quest for Fundamentals
, 1995
"... Fixed exchange rates are less volatile than floating rates. But the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes. This suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successf ..."
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Cited by 262 (11 self)
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Fixed exchange rates are less volatile than floating rates. But the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes. This suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful. It also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability. Keywords: structural, traditional, volatility, monetary, fixed, floating, regime. JEL Classification Numbers: F31, F33. ____________________________________________________________________________ * Corresponding Author * Flood is: Senior Economist, Research Department, IMF; and Research Associate, NBER. Rose is: Associate Professor and Chair of Economic Analysis and Policy, Haas School of Business, University of California, Berkeley; Research Associate, NBER; and Research Fellow, CEPR. Part of this work was completed while Rose was visiting the IMF Research Department a...
