 How many fundamentals should we include in the behavioral equilibrium exchange rate model?Ca’ Zorzi, Michele and Michał Rubaszek Economic Modelling, 2023, vol. 118, issue C Abstract: This paper evaluates the reliability of alternative equilibrium exchange rate assessments. The literature has predominantly relied on the behavioral equilibrium exchange rate (BEER) model, which attempts to establish a long-term link between the real exchange rate and economic fundamentals. We challenge the recent tendency among BEER modelers to increase the number of regressors. The wisdom of this choice is evaluated with the criterion that equilibrium exchange rates should help predict the future trajectory of real exchange rates. Using panel data for 30 countries during the period 1991–2018, we show that it is hard to outperform both a parsimonious BEER model (with only three fundamentals) and the relative PPP model (which excludes a role for fundamentals in the long run). This finding calls for caution in the ability of economists to closely map the evolution of equilibrium exchange rates and economic fundamentals. Keywords: Equilibrium exchange rate models; Forecasting; Panel data (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:118:y:2023:i:c:s026499932200308x DOI: 10.1016/j.econmod.2022.106071 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.