The Continuing Puzzle of Short Horizon Exchange Rate Forecasting

Rogoff, Kenneth; Stavrakeva, Vania

doi:10.3386/w14071

Cited by 118 publications

(129 citation statements)

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“…This idea commonly appears in both the research literature [see, for example, Chen and Rogoff (2003) and Chen (2004)] and press commentaries. 1 The second explanation stresses the financial and speculative features of foreign exchange markets: exchange rates can help predict economic fundamentals including commodity prices; see, for example, Meese and Rogoff (1983), Engel and West (2005), Cheung, Chinn and Pascual (2005), Rogoff and Stavrakeva (2008), Chen, Rogoff and Rossi (2010) and Rossi (2013). Following the first mechanism, commodity prices should help predict exchange rate movements.…”

Section: Introductionmentioning

confidence: 99%

Exchange rates and commodity prices: Measuring causality at multiple horizons

Zhang

Dufour

Galbraith

2016

Journal of Empirical Finance

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Section: Introductionmentioning

confidence: 99%

Exchange rates and commodity prices: Measuring causality at multiple horizons

Zhang

Dufour

Galbraith

2016

Journal of Empirical Finance

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“…For instance, see Mark and Sul (2001), Engel, Mark, and West (2007), and Rogoff and Stavrakeva (2008). It would be interesting to incorporate these studies into interval forecasting.…”

Section: Resultsmentioning

confidence: 99%

The Taylor Rule and Forecast Intervals for Exchange Rates

Wang¹,

Wu²

2008

gwp

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This paper attacks the Meese-Rogoff (exchange rate disconnect) puzzle from a different perspective: out-of-sample interval forecasting. Most studies in the literature focus on point forecasts. In this paper, we apply Robust Semi-parametric (RS) interval forecasting to a group of Taylor rule models. Forecast intervals for twelve OECD exchange rates are generated and modified tests of Giacomini and White (2006) are conducted to compare the performance of Taylor rule models and the random walk. Our contribution is twofold. First, we find that in general, Taylor rule models generate tighter forecast intervals than the random walk, given that their intervals cover out-of-sample exchange rate realizations equally well. This result is more pronounced at longer horizons. Our results suggest a connection between exchange rates and economic fundamentals: economic variables contain information useful in forecasting the distributions of exchange rates. The benchmark Taylor rule model is also found to perform better than the monetary and PPP models. Second, the inference framework proposed in this paper for forecast-interval evaluation can be applied in a broader context, such as inflation forecasting, not just to the models and interval forecasting methods used in this paper.

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“…Goldberg and Frydman (1996a,b) find that short-term currency fluctuations depend on fundamentals, but that this relationship is temporally unstable. See also Rogoff and Stavrakeva (2008). For evidence that fundamental considerations are the main drivers of equity prices, but in temporally unstable ways, see Mangee (2011). In this sense, IKE reframes the relationship between the individual and aggregate levels of analysis: its models' microfoundations incorporate the influence that the broader social and historical context, together with actual aggregate outcomes, has on market participants' decisionmaking process.…”

Section: Returning Economic Fundamentals To Models Of Expectationsmentioning

confidence: 99%

Which Way Forward for Macroeconomics and Policy Analysis?

Frydman¹,

Phelps

2013

Rethinking Expectations

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There was a palpable sense of excitement among the economists who met in Philadelphia in 1969 at the conference organized by Edmund Phelps. Their research over the preceding years had coalesced into a new approach to macroeconomic analysis, one that based macrorelationships on explicit microfoundations. These foundations' distinctive feature was to accord market participants' expectations an autonomous role in economists' models of aggregate outcomes. The conference contributions, published in what came to be known as "the Phelps microfoundations volume" (Phelps et al. 1970), provided radically new accounts of the comovements of macroeconomic aggregates-notably, inflation and unemployment. They also cast serious doubt on the validity of policy analysis based on then-popular Keynesian macroeconometric models.The Phelps volume is often credited with pioneering the currently dominant approach to macroeconomic analysis. Indeed, it is easy to see why today's prevailing models of aggregate outcomes might seem to share much with their counterparts in the Phelps volume. Like their predecessors in the late 1960s, economists today often point to their models' "microfoundations" as their essential feature. Moreover, in modeling decisionmaking, these microfoundations include a representation of market participants' expectations. However, on closer inspection, the similarities between today's models and those included in the Phelps volume are purely linguistic.

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The Continuing Puzzle of Short Horizon Exchange Rate Forecasting

Cited by 118 publications

References 61 publications

Exchange rates and commodity prices: Measuring causality at multiple horizons

Exchange rates and commodity prices: Measuring causality at multiple horizons

The Taylor Rule and Forecast Intervals for Exchange Rates

Which Way Forward for Macroeconomics and Policy Analysis?

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