Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257251 
Year of Publication: 
2021
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 9 [Issue:] 2 [Article No.:] 93 [Publisher:] MDPI [Place:] Basel [Year:] 2021 [Pages:] 1-27
Publisher: 
MDPI, Basel
Abstract: 
This paper examines the effectiveness of the Taylor rule in contemporary times by investigating the exchange rate forecastability of selected four Organisation for Economic Co-operation and Development (OECD) member countries vis-à-vis the U.S. It employs various Taylor rule models with a non-drift random walk using monthly data from 1995 to 2019. The efficacy of the model is demonstrated by analyzing the pre- and post-financial crisis periods for forecasting exchange rates. The out-of-sample forecast results reveal that the best performing model is the symmetric model with no interest rate smoothing, heterogeneous coefficients and a constant. In particular, the results show that for the pre-financial crisis period, the Taylor rule was effective. However, the post-financial crisis period shows that the Taylor rule is ineffective in forecasting exchange rates. In addition, the sensitivity analysis suggests that a small window size outperforms a larger window size.
Subjects: 
financial crisis
directional accuracy
exchange rate
forecast
out-of-sample
random walk
Taylor rule fundamentals
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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