Limited Participation and Exchange Rate Dynamics: Does Theory Meet the Data?

Frédéric Karamé, Lise Patureau () and Thepthida Sopraseuth

No 03-15, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: Meese and Rogoff [1983] show that macroeconomic models “of the Seventies” fail to outperform the random walk exchange rate forecasts. Macroeconomics thus provide useless information as far as out-of-sample exchange rate forecasting is concerned. However, since Meese and Rogoff’s seminal paper, advances have been made in the theoretical modeling of international macroeconomic dynamics. New Open Economy Macroeconomics, developed in the wake of Obstfeld and Rogoff [1995]’s work, show that intertemporal general equilibrium models capture international stylized facts. In particular, Hairault, Patureau, and Sopraseuth [2002] have shown that a small open economy model based on credit market frictions successfully accounts for exchange rate volatility. This paper aims at assessing the empirical performances of this model. First, the model statistically matches a large set of features observed in the data, in addition to exchange rate dynamics. Credit market frictions are found to be critical in making the model consistent with the data. Secondly, we find that, in the recent period only, the limited participation model succeeds in outperforming the random walk exchange rate forecasts in the medium run.

Keywords: New Open Economy Macroeconomics; Simulated Method of Moments; Exchange Rate Forecasts (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.univ-evry.fr/fileadmin/mediatheque/uev ... es/Epee/wp/03-15.pdf (application/pdf)

Related works:
Journal Article: Limited participation and exchange rate dynamics: Does theory meet the data? (2008)
Working Paper: Limited participation and exchange rate dynamics: Does theory meet the data? (2008)
Working Paper: Limited participation and exchange rate dynamics: does theory meet the data? (2003)
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:eve:wpaper:03-15

Access Statistics for this paper

More papers in Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne Contact information at EDIRC.
Bibliographic data for series maintained by Samuel Nosel ().