Working Paper: NBER ID: w12481
Authors: Ron Alquist; Menzie D. Chinn
Abstract: We examine the relative predictive power of the sticky price monetary model, uncovered interest parity, and a transformation of net exports and net foreign assets. In addition to bringing Gourinchas and Rey's new approach and more recent data to bear, we implement the Clark and West (forthcoming) procedure for testing the significance of out-of-sample forecasts. The interest rate parity relation holds better at long horizons and the net exports variable does well in predicting exchange rates at short horizons in-sample. In out-of-sample forecasts, we find evidence that our proxy for Gourinchas and Rey's measure of external imbalances outperforms a random walk at short horizons as do some of other models, although no single model uniformly outperforms the random walk forecast.
Keywords: No keywords provided
JEL Codes: F31; F47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rate parity relation (E43) | predictive capabilities (C53) |
| net exports (F29) | exchange rates (F31) |
| external imbalances (F32) | exchange rate movements (F31) |
| external imbalances (F32) | predictive power for exchange rates (F37) |
| random walk model (C69) | predictive capabilities (C53) |