11 Lessons From Empirical Models of Exchange Rates
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

This paper finds scope for optimism that the empirical modeling of exchange rates will someday lead to significantly better-than-random explanations. The first part of the paper focuses on the relationships among exchange rates, national price levels, interest rates, and international balances of payments and provides perspectives on some elements of truth about these relationships that are consistent with the past decade of modeling failures. It considers some general lessons and open issues for the design of better models. The lessons emphasize the importance of analyzing exchange rates within complete macroeconomic frameworks and of assuming that expectations are formed in ways consistent with the structural models or with information that can be easily extracted from time series of relevant variables.