Modelling and Forecasting the Indian Re/US Dollar Exchange Rate

Pami Dua and Rajiv Ranjan
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Rajiv Ranjan: Reserve Bank of India, India

No 197, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: This paper develops vector autoregressive and Bayesian vector autoregressive models to forecast the Indian Re/US dollar exchange rate which is governed by a managed floating exchange rate regime. It considers extensions of the monetary model that include the forward premium, capital inflows, volatility of capital flows, order flows and central bank intervention. The study finds that the monetary model generally outperforms the naïve model. It also finds that forecast accuracy can be improved by extending the monetary model to include forward premium, volatility of capital inflows and order flow. Information on intervention by the central bank also helps to improve forecasts at the longer end. The study also reports that the Bayesian vector autoregressive models generally outperform their corresponding VAR variants.

Keywords: exchange rate; monetary model; VAR and Bayesian VAR models (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 F31 F47 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2011-02
New Economics Papers: this item is included in nep-cba, nep-for and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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