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Title:Forecasting and combining competing models of exchange rate determination PDF Logo
Authors:Altavilla, Carlo
De Grauwe, Paul
Issue Date:2006
Series/Report no.:CESifo working paper 1747
Abstract:This paper investigates the out-of-sample forecast performance of a set of competing models of exchange rate determination. We compare standard linear models with models that characterize the relationship between exchange rate and its underlying fundamentals by nonlinear dynamics. Linear models tend to outperform at short forecast horizons especially when deviations from long-term equilibrium are small. In contrast, nonlinear models with more elaborate mean-reverting components dominate at longer horizons especially when deviations from long-term equilibrium are large. The results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model.
JEL:F31
C53
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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