Real exchange-rate prediction over long horizons

Abstract

In studying monthly real exchange rates between the US and Britain, Canada, Germany, and Japan from 1961 to 1993, we find that the deviation of the log real exchange rate from its time-varying, long-run equilibrium value contains a statistically significant predictable component at the four-year horizon over a forecast period extending from 1985 to 1993. Fixed-effects regressions employing differentials in productivity, real interest rates, and per capita income display some predictive power but fundamentals based on simple monetary models are generally more accurate and significant.

Why is it So Difficult to Find an Effect of Exchange Rate Risk on Trade?

“…Nevertheless, a random walk based forecasting rule is a good approximation (see Meese and Rogo¤ (1983), and Mark and Choi (1997) for empirical evidence).…”

Impacts of Credit Default Swaps on Volatility of the Exchange Rate in Turkey: The Case of Euro

“…In earlier studies, the dynamics of exchange rates have been mainly attributed to monetary factors [1,2], real macroeconomic variables [3][4][5][6][7][8] as well as resource endowments and changes in terms of trade and productivity differentials relative to a country's trading partners [9]. Apart from that, commodity prices, such as oil, are also a focus of studies [10][11][12] to investigate the reasons for exchange rate fluctuations.…”

Global imbalances: Should we use fundamental equilibrium exchange rates?

“…Our results provide empirical evidences that exchange rates return to their fundamentals values as in Mark and Choi (1997) and Mark and Sul (2001). Besides, as the return to the equilibrium is quite slow (almost eight years in case of cyclical evolution of competitiveness), our results could be seen as a justification to intervene on foreign exchange markets to realign exchange rates in order to reduce global imbalances and associated risks.…”