Forecasting the nominal exchange rate movements in a changing world. The case of the U.S. and the U.K

David Peel and Pantelis Promponas

No 144439514, Working Papers from Lancaster University Management School, Economics Department

Abstract: Exchange rate forecasting has become an arena for many researchers the last decades while predictability depends heavily on several factors such as the choice of the fundamentals, the econometric model and the data form. The aim of this paper is to assess whether modelling time-variation and other forms of instabilities may improve the forecasting performance of the models. Paper begins with a brief critical review of the recently developed exchange rate forecasting models and continues with a real-time forecasting race between our fundamentals-based models, a DSGE model, estimated with Bayesian techniques and the benchmark random walk model without drift. Results suggest that models accounting for non-linearities may generate poor forecasts relative to more parsimonious and linear models.

Keywords: Forecasting exchange rate; Exchange rate literature; Instability; Taylor rule; PPP; UIP; Money supply; Real-time estimation; Time-Varying models; DSGE model; Bayesian methods (search for similar items in EconPapers)
JEL-codes: C53 E51 E52 F31 F37 G17 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:144439514

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