Exchange Rate Predictability in a Changing World

Joseph Byrne, Dimitris Korobilis and Pinho J. Ribeiro
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Pinho J. Ribeiro: Department of Economics, Adam Smith Business School, University of Glasgow, UK

Working Paper series from Rimini Centre for Economic Analysis

Abstract: An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.

Keywords: Exchange Rate Forecasting; Taylor Rules; Time-Varying Parameters; Bayesian Methods (search for similar items in EconPapers)
JEL-codes: C53 E52 F31 F37 G17 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-cba, nep-for, nep-int, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.rcea.org/RePEc/pdf/wp06_14.pdf (application/pdf)

Related works:
Journal Article: Exchange rate predictability in a changing world (2016)
Working Paper: Exchange Rate Predictability in a Changing World (2014)
Working Paper: Exchange Rate Predictability in a Changing World (2014)
Working Paper: Exchange Rate Predictability in a Changing World (2014)
Working Paper: Exchange Rate Predictability in a Changing World (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:06_14

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