Private Information and a Macro Model of Exchange Rates: Evidence from a Novel Data Set

Menzie Chinn and Michael Moore

No 14175, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose an exchange rate model which is a hybrid of the conventional specification with monetary fundamentals and the Evans-Lyons microstructure approach. It argues that the failure of the monetary model is principally due to private preference shocks which render the demand for money unstable. These shocks to liquidity preference are revealed through order flow. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on inter-dealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or "hybrid", model exhibits out of sample forecasting improvement over the basic macroeconomic and random walk specifications.

JEL-codes: D82 F31 F41 F47 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac, nep-mon, nep-mst and nep-opm
Note: IFM
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Citations: View citations in EconPapers (13)

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