Exchange rate forecasting with DSGE models

Ca’ Zorzi, Michele, Marcin Kolasa and Michał Rubaszek
Authors registered in the RePEc Author Service: Michele Ca' Zorzi

Journal of International Economics, 2017, vol. 107, issue C, 127-146

Abstract: We run an exchange rate forecasting “horse race”, which highlights that three principles hold. First, forecasts should not replicate the high volatility of exchange rates observed in sample. Second, models should exploit the mean reversion of the real exchange rate over long horizons. Third, they should account for the international price co-movement seen in the data. Abiding by the first two principles an open-economy dynamic stochastic general equilibrium (DSGE) model performs well in forecasting the real but not the nominal exchange rate. Only approaches that conform to all three principles tend to outperform the random walk.

Keywords: Forecasting; Exchange rates; New open economy macroeconomics; Mean reversion (search for similar items in EconPapers)
JEL-codes: C32 F31 F41 F47 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Related works:
Working Paper: Exchange rate forecasting with DSGE models (2017)
Working Paper: Exchange rate forecasting with DSGE models (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:107:y:2017:i:c:p:127-146

DOI: 10.1016/j.jinteco.2017.03.011

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