Was it Real? The Exchange Rate-Interest Differential Relation, 1973-1984 / Richard Meese, Kenneth Rogoff.

By:

Meese, Richard

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w1732.Publication details: Cambridge, Mass. National Bureau of Economic Research 1985.Description: 1 online resource: illustrations (black and white)Subject(s):

F - International Economics

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Abstract: The main result of Meese and Rogoff [1983 a,b] is that small structural exchange rate models forecast major dollar exchange rates no better than a naive random walk model. This result obtains even when the model forecasts are based on actual realized values of the explanatory variables. Here we improve our methodology by implementing a new test of out-of-sample fit; the test is valid even for overlapping long-horizon forecasts. We find that the dollar exchange rate models perform somewhat less badly over the recent Reagan regime period than over the episodes studied previously. The methodology is also applied to the mark/yen and mark/pound exchange rates, and to real exchange rates. Finally, we test to see if real exchange rates and real interest differentials can be represented as a cointegrated process. The evidence suggests that there is no single common influence inducing nonstationarity in both real exchange rates and real interest differentials.

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Previous	nber w17317 Fiscal Volatility Shocks and Economic Activity /	nber w17318 How Reliable are De Facto Exchange Rate Regime Classifications? /	nber w17319 Optimal Fiscal Policy with Endogenous Product Variety /	nber w1732 Was it Real? The Exchange Rate-Interest Differential Relation, 1973-1984 /	nber w17320 Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions /	nber w17321 Implicit Guarantees and Risk Taking: Evidence from Money Market Funds /	nber w17322 Was What Ail'd Ya' What Kill'd Ya'? /	Next

October 1985.

The main result of Meese and Rogoff [1983 a,b] is that small structural exchange rate models forecast major dollar exchange rates no better than a naive random walk model. This result obtains even when the model forecasts are based on actual realized values of the explanatory variables. Here we improve our methodology by implementing a new test of out-of-sample fit; the test is valid even for overlapping long-horizon forecasts. We find that the dollar exchange rate models perform somewhat less badly over the recent Reagan regime period than over the episodes studied previously. The methodology is also applied to the mark/yen and mark/pound exchange rates, and to real exchange rates. Finally, we test to see if real exchange rates and real interest differentials can be represented as a cointegrated process. The evidence suggests that there is no single common influence inducing nonstationarity in both real exchange rates and real interest differentials.