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Working Paper No. 06-05
University of California, Santa Cruz Institute for International Economics (SCIIE), Santa Cruz, CA
We examine the relative predictive power of the sticky price monetary model, uncovered interest parity, and a transformation of the net exports variable. In addition to bringing a new approach (utilizing our measure of external imbalance suggested by Gourinchas and Rey) and data spanning a more recent period to bear, we implement the Clark and West (forthcoming) procedure for testing the significance of out-of-sample forecasts. The interest rate parity relation holds better at long horizons and the net exports variable does well in predicting exchange rates at short horizons in-sample. In out-of-sample forecasts, we find evidence that uncovered interest parity outperforms a random walk at long horizons and that the measure of external imbalance does well at short horizons, although we cannot duplicate the findings of Gourinchas and Rey.
exchange rates
monetary model
net foreign assets
interest rate parity
forecasting performance
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Working Paper

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