DP188 Exchange Rates, Innovations and Forecasting

Author(s): Christian C Wolff
Publication Date: May 1987
Keyword(s): Exchange Rates, Forecasting, News, Random Walk
JEL(s): 132, 212, 431
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=188

In this paper an ex-post forecasting experiment is performed on the basis of a version of the "news" model of exchange rate determination. A general finding is that the "news" formulation of monetary exchange rate models leads to relatively accurate ex post exchange rate forecasts. Often the results compare favourably with those obtained from the naive random walk forecasting rule. Thus, the evidence presented in this paper supports the argument that the 1983 finding by Meese and Rogoff (that structural models do not even outperform the random walk in an ex post forecasting experiment) may be due to the fact that the models were not properly tested in a "news" framework.