Pitfalls in Econometric Forecasting with Illustrations from Exchange Rate Economics

Ebrahim Merza and Imad A. Moosa
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Ebrahim Merza: Department of Economics, Kuwait University, Kuwait City, Kuwait
Imad A. Moosa: Department of Economics, Kuwait University, Kuwait City, Kuwait

Economia Internazionale / International Economics, 2023, vol. 76, issue 2, 147-172

Abstract: Pitfalls in econometric forecasting are illustrated with reference to the ability of economists to forecast exchange rates, which is bound to bring about the Meese-Rogoff puzzle that exchange rate forecasting models cannot outperform the random walk in out-of-sample forecasting. Loopholes in forecasting include the use of dynamic models to generate forecasts, taking the forward rate to be a forecaster, and invoking the concept of cointegration to resolve the Meese-Rogoff puzzle. It is concluded that the flaws that can be detected easily in the forecasting literature provide a good enough reason for handling forecasts with care and that the way forward is to abandon the practice of producing allegedly precise point forecasts. Difficoltà delle previsioni econometriche con spiegazioni dall’economia dei tassi di cambio Le difficoltà delle previsioni econometriche vengono illustrate con riferimento all’abilità degli economisti di prevedere i tassi di cambio. Ciò rinvia al puzzle di Meese-Rogoff secondo il quale i modelli di previsione dei tassi di cambio non possono dare migliori risultati delle previsioni fuori campioni con modelli random walk. Gli artifici usati nelle previsioni includono l’uso di modelli dinamici per generare le previsioni, considerando il tasso a termine come previsore e ricorrendo al concetto di cointegrazione per risolvere il puzzle di Meese-Rogoff. Si conclude che le lacune in genere evidenziate nella letteratura sulle previsioni rappresentano una ragione sufficientemente valida per considerare le previsioni ottenute con attenzione e per abbandonare la pratica di fornire previsioni presumibilmente poco precise.

Keywords: Forecasting; Meese-Rogoff Puzzle; Forward Rate; Dynamic Models; Cointegration (search for similar items in EconPapers)
JEL-codes: C10 C18 F31 (search for similar items in EconPapers)
Date: 2023
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