 A new approach to forecasting exchange ratesKenneth Clements and Yihui Lan Journal of International Money and Finance, 2010, vol. 29, issue 7, 1424-1437 Abstract: Building on purchasing power parity theory, this paper proposes a new approach to forecasting exchange rates using the Big Mac data from The Economist magazine. Our approach is attractive in three aspects. Firstly, it uses easily-available Big Mac prices as input. These prices avoid several potential problems associated with broad price indexes, such as the consumer price index used in conventional PPP studies. Secondly, this approach provides real-time exchange-rate forecasts at any forecast horizon. These high-frequency forecasts could be appealing to those who want up-to-date exchange-rate forecasts. Finally, as our forecasts are obtained through a simulation procedure, estimation uncertainty is made explicit in our framework that provides the entire distribution of exchange rates, not just a single point estimate. Using exchange rates of six major currencies to illustrate the approach, we compare the Big Mac forecasts with those derived from a random walk and the CPI and find some support for our approach, especially at longer term horizons. Keywords: Exchange-rate; forecasting; Big; Mac; prices; Purchasing; power; parity; Simulation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:29:y:2010:i:7:p:1424-1437 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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