Cover IMF Working Papers
Medium-Term Exchange Rate Forecasting: What Can We Expect?
Author:
Mr. Guy M Meredith
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Series:
IMF Working Papers
Volume/Issue:
Volume 2003: Issue 021
Language:
English
Publication Date:
01 Jan 2003
DOI:
https://doi.org/10.5089/9781451843934.001
ISBN:
9781451843934
ISSN:
1018-5941
Pages:
31
Keywords:
WP; random walk; mean reversion; forward rate; null hypothesis; exchange rate; forecasting; purchasing power parity; mean-reversion regression; exchange rate movement; sample estimation result; adjustment parameter; sample period; Exchange rates; Exchange rate adjustments; Interest rate parity; Real effective exchange rates
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The medium-term predictability of exchange rate movements is examined using three models of fundamentals: purchasing power parity, the monetary model, and uncovered interest parity. While the first two approaches yield favorable in-sample results, these largely reflect finite-sample estimation biases. Adjusting for these biases, there is little evidence of predictability, consistent with the lack of systematic improvement in out-of-sample forecasting performance relative to a random walk. Uncovered interest parity fares better at long horizons, but reflects information already embodied in market prices; in this sense, it may not be useful as an indicator of exchange rate misalignment. While more elaborate models of fundamentals might have better medium-term forecasting properties, careful attention must be paid to finite-sample biases in assessing predictability.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2003: Issue 021