Export file:

Format

  • RIS(for EndNote,Reference Manager,ProCite)
  • BibTex
  • Text

Content

  • Citation Only
  • Citation and Abstract

Forecasting the Taylor rule exchange rate model using directional change tests

1 Coventry University, UK
2 Department of Economics, University of Bath, Bath, UK, BA2 7AY

This study uses the Taylor rule model of exchange rate determination, to analyse how accurately it can predict directional changes in the exchange rate. Using bilateral exchange rate data for the US, UK, Sweden and Australia, we conduct the Pesaran-Timmermann test to determine how accurately this model can forecast changes in direction. The results suggest that although in many studies the standard out-of-sample forecasting ability of this model has been successful, the performance of the change of direction predictions are not consistently accurate over all specifications tested, in which case they may not prove profitable in a trading environment.
  Figure/Table
  Supplementary
  Article Metrics

References

1.Bacchetta P, Wincoop E Van (2006) Can information heterogeneity explain the exchange rate determination puzzle? Am Econ Rev 96: 552–576.    

2.Beckmann J, Belke A, Kuehl M (2011) The Stability of the Dollar-Euro Exchange Rate Determination Equation-A Time-varying Coefficient Approach. Rev World Econ 14: 11–40.

3.Beckmann J, Belke A, Dobnik R (2012) Cross-section Dependence and the Monetary Exchange Rate Model-A Panel Analysis. N Am Econ Financ 23: 38–53.    

4.Beckmann J, Belke A, Czudaj R (2013) Current Account and Real Effective Dollar Exchang Rates. Kredit und Kapital 46: 213–232.

5.Beckmann J, Belke A, Czudaj R (2014) The Importance of Global Shocks for National Policymakers-Rising Challenges for Sustainable Monetary Policies. The World Econ 37: 1101–1127.    

6.Beckmann J, Belke A, Czudaj R (2015) Productivity Shocks and Real Effective Exchange Rates. Rev Dev Econ 19: 502–515.    

7.Case KE, Quigley JM, Shiller RJ (2005) Comparing wealth effects: the stock market versus the housing market. B E J macroecon 5: 1–34.

8.Chen J (2006) Re-evaluating the association between housing wealth and aggregate consumption: new evidence from Sweden. J Hous Econ 15: 321–348.    

9.Chen C, Yao S, Ou J (2017) Exchange rate dynamics in a Taylor rule framework. J Int Financ Mark Inst Money 46: 158–173.    

10.Clarida R, Galı́ J, Gertler M (1998) Monetary Policy Rules in Practice: Some International Evidence. Eur Econ Rev 42: 1033–1067.    

11.Dornbusch R (1976) Expectations and Exchange Rate Dynamics. J Polit Econ 82: 1161–1176.

12.Engel C, West KW (2006) Taylor Rules and the Deutschmark-Dollar Real Exchange Rate. J Money Credit Bank 38: 1175–1194.    

13.Glynn J, Perera N, Verma R (2007) Unit Root Tests and Structural Breaks: A Survey with Applications. Revista de Métodos Cuantitativos para la Economía y la Empresa 3: 63–79.

14.Greer M (2003) Directional accuracy tests of long-term interest rate forecasts. Int J Forecast 19: 291–298.    

15.Hong Y, Chung J (2003) Are the Directions of Stock Price Changes Predictable? Statistical Theory and Evidence. Cornell University.

16.Ince O (2014) Forecasting Exchange Rates Out-of-Sample with Panel Methods and Real-Time Data. J Int Money Finan 43: 1–18.    

17.Jian W, Wu J (2009) The Taylor Rule and Interval Forecast for Exchange Rates. FRB International Finance Discussion Paper 963.

18.Knetsch T (2007) Forecasting the price of crude oil via convenience yield predictions. J Forecast 26: 527–549.    

19.Lee J, Stazicich M (2003) Minimum Lagrange Multiplier unit root tests with 2 structural breaks. Rev Econ Stat 85: 1082–1089.    

20.Leitch G, Tanner JE (1991) Economic forecast evaluation: profits versus the conventional error measures. Am Econ Rev 81: 580–590.

21.Leung M, Daouk H, Chen A (2000) Forecasting stock indices: A comparison of classification and level estimation models. Int J Forecast 16: 173–190.    

22.Meese RA, Rogoff K (1983) Empirical exchange rate models of the seventies: Do they fit out of sample? J Int Econ 14: 3–24.    

23.Molodtsova T, Papell DH (2009) Out-of-Sample Exchange Rate Predictability with Taylor Rule Fundamentals. J Int Econ 77: 167–180.    

24.Mitchell K, Pearce D (2007) Professional forecasts of interest rates and exchange rates: Evidence from the Wall Street Journal's panel of Economists. J Macroecon 29: 840–854.    

25.Nyberg H (2011) Forecasting the direction of the US stock market with dynamic binary probit models. Int J Forecast 27: 561–578.    

26.Pesaran MH, Timmermann A (1992) A simple nonparametric test of predictive performance. J Bus Econ Stat 10: 461–465.

27.Pesaran H, Timmermann A (2004) How Costly Is It to Ignore Breaks when Forecasting the Direction of a Time Series? Int J Forecast 20: 411–425.    

28.Pons J (2000) The accuracy of IMF and OECD forecasts for G7 countries. J Forecast 19: 53–63.    

29.Qi M, Wu Y (2003) Non-linear prediction of exchange rates with monetary fundamentals. Int J Forecast 10: 623–640.

30.Semmler W, Zhang W (2007) Asset price volatility and monetary policy rules: a dynamic model and empirical evidence. Econ Model 24: 411–430.    

31.Simclair T, Stekler H, Kitzinger L (2008) Directional Forecasts of GDP and Inflation: A Joint Evaluation with an Application to Federal Reserve Predictions. Appl Econ 42: 2289–2297.

32.Wang R, Morley B, Ordonez J (2016) The Taylor rule wealth effects and the exchange rate. Rev Int Econ 24: 282–301.    

33.Wu J, Xia F (2016) Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound. J Money Credit Bank 48: 253–291.    

© 2018 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution Licese (http://creativecommons.org/licenses/by/4.0)

Download full text in PDF

Export Citation

Article outline

Show full outline
Copyright © AIMS Press All Rights Reserved