Model Uncertainty of Real Exchange Rate Forecast over Mid-term Horizons

Munehisa Kasuya and Izumi Takagawa
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Munehisa Kasuya: Bank of Japan
Izumi Takagawa: Bank of Japan

Bank of Japan Working Paper Series from Bank of Japan

Abstract: We investigate the significance of fundamentals variables and uncertainty of appropriate models in one-, two-, four-, and eight-quarter ahead forecasts of quarterly yen-dollar real exchange rates by using 16 fundamentals-based models and the random walk model. Our empirical results show significance of fundamentals variables in two-, four-, and eight-quarter ahead forecasts. Moreover, the reversible jump MCMC approach for uncertainty of appropriate models indicates that appropriate models change over both forecast-time-span and forecast period. This uncertainty could not be fully explained by the hypothesis that real exchange rates are ultimately governed by the true fundamentals-based model.

Keywords: Exchange rates; Fundamentals; Prediction; Reversible Jump; Markov Chain Monte Carlo (search for similar items in EconPapers)
JEL-codes: F31 F37 F47 (search for similar items in EconPapers)
Date: 2001-12
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Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:01-e-23r

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