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Exchange rate forecasting with DSGE models

Marcin Kolasa (), Michał Rubaszek () and Michele Ca' Zorzi

No 260, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

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)
New Economics Papers: this item is included in nep-dge and nep-for
Date: 2017
Note: The paper was presented at Narodowy Bank Polski (Warsaw, September 2015), the European Central Bank (Frankfurt, October 2015), the 16th IWH-CIREQ Macroeconometric Workshop (Halle, December 2015), Norges Bank (Oslo, January 2016), the 4th International Symposium in Computational Economics and Finance (Paris, April 2016), the 36th International Symposium on Forecasting (Santander, June 2016) and the 31th annual congress of the European Economic Association (Geneva, August 2016).
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Citations: View citations in EconPapers (12) Track citations by RSS feed

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Journal Article: Exchange rate forecasting with DSGE models (2017) Downloads
Working Paper: Exchange rate forecasting with DSGE models (2016) Downloads
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