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Predicting sharp depreciations in industrial country exchange rates

Jonathan Wright and Joseph Gagnon

No 881, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper considers the prediction of large depreciations (both nominal and real) in a panel of industrialized countries using a probit methodology. The current account balance/GDP ratio has a modest but statistically significant effect on the estimated probability of a large depreciation, and gives slight predictive power in an out-of-sample forecasting exercise. The CPI inflation rate also has a modest but statistically significant effect in predicting nominal depreciations and has slight predictive power, but this effect is not present for real exchange rates. The GDP growth rate occasionally has a significant effect. A higher current account balance (surplus) tends to reduce the probability of a sharp depreciation; a higher inflation rate tends to increase the probability of a sharp depreciation; and a higher GDP growth rate perhaps tends to reduce the probability of a sharp depreciation.

Keywords: Foreign exchange rates; Econometric models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-for
Date: 2006
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