Do Divisia monetary aggregates help forecast exchange rates in a negative interest rate environment?

Luis Antonio Molinas, Jane M. Binner and Meng Tong

The European Journal of Finance, 2023, vol. 29, issue 7, 780-799

Abstract: This paper contributes to the literature as the first work of its kind to examine the role and importance of Divisia monetary aggregates and concomitant User Cost Price indices as superior monetary policy forecasting tools in a negative interest rate environment. We compare the performance of Divisia monetary aggregates with traditional simple-sum aggregates in several theoretical models and in a Bayesian VAR to forecast the exchange rates between the euro, the dollar and yuan at various horizons using quarterly data. We evaluate their performance against that of a random walk using two criteria: Root Mean Square Error ratios and the Clark-West statistic. We find that, under a free-floating exchange regime, superior Divisia monetary aggregates outperform their simple sum counterparts and the benchmark random walk in a negative interest rate environment, consistently.

Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/1351847X.2022.2124120 (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:taf:eurjfi:v:29:y:2023:i:7:p:780-799

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/1351847X.2022.2124120

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().