Integration, Cointegration and the Forecast Consistency of Structural Exchange Rate Models
55 Pages Posted: 15 Sep 2000 Last revised: 29 Sep 2022
There are 2 versions of this paper
Integration, Cointegration and the Forecast Consistency of Structural Exchange Rate Models
Integration, Cointegration and the Forecast Consistency of Structural Exchange Rate Models
Date Written: February 1997
Abstract
Exchange rate forecasts are generated using some popular monetary models of exchange rates in conjunction with several estimation techniques. We propose an alternative set of criteria for evaluating forecast rationality which entails the following requirements: the forecast and the actual series i) have the same order of integration, ii) are cointegrated, and iii) have a cointegrating vector consistent with long run unitary elasticity of expectations. When these conditions hold, we consider the forecasts to be consistent.' We find that it is fairly easy for the generated forecasts to pass the first requirement. However, according to the Johansen procedure, cointegration fails to hold the farther out the forecasts extend. At the one year ahead horizon, most series and their respective forecasts do not appear cointegrated. Of the cointegrated pairs, the restriction of unitary elasticity of forecasts with respect to actual appears not to be rejected in general. The exception to this pattern is in the case of the error correction models in the longer subsample. Using the Horvath-Watson procedure, which imposes a unitary coefficient restriction, we find fewer instances of consistency, but a relatively higher proportion of the identified cases of consistency are found at the longer horizons.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Tests of Equal Forecast Accuracy and Encompassing for Nested Models
-
Long Swings in the Exchange Rate: are They in the Data and Do Markets Know it?
-
Exchange Rates and Fundamentals
By Charles M. Engel and Kenneth D. West
-
Exchange Rates and Fundamentals
By Charles M. Engel and Kenneth D. West
-
Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?
-
Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?
By Lutz Kilian
-
Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?
By Yin-wong Cheung, Menzie David Chinn, ...