Can Economists Forecast Exchange Rates? The Debate Re-Visited: The Case of the USD/GBP Market

Barry A. Goss and S. Gulay Avsar

Australian Economic Papers, 2016, vol. 55, issue 1, 14-28

Abstract: type="main">

In the debate on forecasting exchange rates, critics claimed that traditional macroeconomic models could not outperform a random walk in post-sample forecasts. Perceived deficiencies include inadequate allowance for simultaneity, and expectations hypotheses inconsistent with the structure of models employed. This paper re-visits the debate, first to address critics' major concerns, and second because in the view of the present authors, the debate closed on an unduly pessimistic note.

This paper develops a simultaneous, rational expectations model of the USD/GBP market, with functional relationships for hedgers, speculators and a spot rate equation. The model is estimated with data contemporaneous to the debate, including a period during which the US Commodity Futures Trading Commission did not collect data on traders' open positions. Using the results of post-debate research on tests for stationarity with missing observations, the model, using only public information, outperforms a random walk in post-sample forecasts of the spot rate. Recent microstructure models of the exchange rate based on order flow have re-kindled the forecasting debate. The model developed here, however, is differentiated from these microstructure models, first because order flow utilises both public and private information, and second because the microstructure models do not directly address critics' concerns.

Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1111/1467-8454.12057 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:ausecp:v:55:y:2016:i:1:p:14-28

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0004-900X

Access Statistics for this article

Australian Economic Papers is currently edited by Daniel Leonard

More articles in Australian Economic Papers from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().