Empirical exchange rate models of the seventies: Do they fit out of sample?

doi:10.1016/0022-1996(83)90017-X

Journal of International Economics

Volume 14, Issues 1–2, February 1983, Pages 3-24

https://doi.org/10.1016/0022-1996(83)90017-X Get rights and content

Abstract

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.

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^∗: Both authors were at the Federal Reserve Board when this paper was written. This paper is a revised version of a paper presented at the International Monetary Fund and at the December 1981 Meetings of the Econometric Society. Robert Flood, Jeffrey Frankel, Robert Hodrick, Peter Hooper, and Julio Rotemberg gave us helpful comments on an earlier draft. We are indebted to Julie Withers and Catherine Crosby for research assistance. This paper represents the views of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System.

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Empirical exchange rate models of the seventies: Do they fit out of sample?

Abstract

European Economic Review

Journal of Financial Economics

Journal of International Money and Finance

Journal of International Economics

A new look at the statistical model identification

IEEE Transaction on Automatic Control

Selection of regressors

International Economic Review

Rational expectations and the exchange rate

The deutsche mark/dollar rate — A monetary analysis

The ‘speculative efficiency’ hypothesis

Journal of Business

Judging the performance of econometric models of the U.S. economy

International Economic Review

A note on exchange-rate expectations and nominal interest differentials

The Journal of Finance

Expectations and exchange rate dynamics

Journal of. Political Economy

On the mark: Comment

American Economic Review

The estimation of simultaneous equations models with lagged endogenous variables and first order serially correlated errors

Econometrica

An analysis of the accuracy of four macroeconometric models

Journal of Political Economy

On the mark: A theory of floating exchange rates based on real interest differentials

American Economic Review

On the mark: Reply

American Economic Review

search of the exchange rate risk premium: A six-currency test assuming mean variance optimization

The mystery of the multiplying marks: A modification of the monetary model

Review of Economics and Statistics

A monetary approach to the exchange rate: Doctrinal aspects and empirical evidence

Scandinavian Journal of Economics

The collapse of purchasing power parities during the 1970's

European Economic Review

Flexible exchange rates, prices, and the role of news: Lessons from the 1970's

Journal of Political Economy

Some joint tests of the efficiency of markets for forward foreign exchange

Review of Economics and Statistics

Theoretical and empirical essays on spot and forward exchange rate determination

Forecasting economic time series