Michael melvin, john prins and duncan shand, blackrock abstract. The paper also provides additional support for the meese and rogoff 1983 1, 1988 2 random walk model, and suggests that the continued search of exchange rate forecasting models are. Pdf empirical exchange rate models of the seventies. Exchange rates and international macroeconomics, frenkel. Download for offline reading, highlight, bookmark or take notes while you read the known, the unknown, and the unknowable in. International finance and macroeconomics, asset pricing this paper compares the true, exante forecasting performance of a microbased model against both a standard macro model and a random walk. Exchange rate determination and intermarket order flow. The popular scholarly exercise of evaluating exchange rate forecasting models relative to a random walk was stimulated by the wellcited meese and rogoff 1983 paper. The particular setup they examine is summarized by this group of. Chapter in nber book nber international seminar on macroeconomics 2009 2010, lucrezia reichlin and kenneth d. Philippe bacchetta, eric van wincoop, toni beutler. About this book introduction marking the culmination of their extensive research into the meese rogoff puzzle, moosa and burns challenge the orthodoxy by demonstrating that the naive random walk model can be outperformed by exchange rate models when forecasting accuracy is measured by metrics that do not rely exclusively on the magnitude of. Inspire a love of reading with prime book box for kids discover delightful childrens books with prime book box, a. International finance and macroeconomics, asset pricing.
The meese and rogoff 1983a,b framework is used to investigate the forecasting power of order flow and it is shown that the order flow specifications reduce rmses, relative to a random walk, for virtually all exchange rates and sampling frequencies. The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. The central claim in this paper is that by explicitly introducing costs of international trade narrowly, transport costs, but more broadly, tariffs, nontariff barriers, and other trade costs, one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twentyfive years. The seminal article by meese and rogoff 1983 points that the exchange rates. The meeserogoff puzzle refers to the proposition that exchange rate models cannot outperform the random walk in outofsample forecasting of exchange rates. This book collects my scholarly research on the behavior of foreign exchange rates conducted over the past twentyfive years. Rogoffthe outof sample failure of empirical exchange rate models.
The known, the unknown, and the unknowable in financial risk. In this paper we evaluate whether parameter instability can account for this puzzle. Using rolling regressions, they show that forecasts based on these models do not outperform forecasts based on the current exchange rate, even when the actual future. Use features like bookmarks, note taking and highlighting while reading demystifying the meeserogoff puzzle. This finding been taken to imply the weakness of international economics and finance and raised the question as to why firms spend money on exchange rate forecasts and use them as an. The messerogoff puzzle has been a debatable topic since 1983 when richard meese and kenneth rogoff demonstrated that no exchange rate model can outperform the random walk in outofsample forecasting. Nov 14, 20 since meese and rogoff 1983a,b, 1988, it has been well known that exchange rates are very difficult to predict using economic models. Meese university of california at berkeley, berkeley, ca 94720, usa kenneth rogoff board of governors of the federal reserve system, washington, dc 20551, usa received july 1981, revised version received april 1982 this study compares the outofsample forecasting accuracy of various structural and time series exchange rate models. A draft is available as a pdf file, as are overhead slides. This pdf is a selection from a published volume from the. However, the recent literature has identified new predictors and models that claim to forecast exchange rates gourinchas and rey 2007, mark 1995, and molodtsova and papell 2009, among others. This study compares the outofsample forecasting accuracy of various structural and time series exchange rate models. Pdf a simple model for expected exchange rate es of.
Burns, kelly 2015 for the past 30 years international monetary economists have believed that exchange rate models cannot outperform the random walk in outofsample forecasting as a result of the 1983 paper written by richard meese and. Pdf can structural change explain the meeserogoff puzzle. This criterion was popularized by the seminal work of meese and rogoff. The collection includes papers that study the behavior of exchange rates from the traditional macroeconomic and. We consider a theoretical reducedform relationship between the exchange rate and fundamentals in which parameters are either constant or time varying.
Taken together, these papers provide sound evidence about the effects of real and monetary factors on exchange rates and extend the analyses of exchange rates and international macroeconomics by. This proposition is regarded as a puzzle because it does not make much sense for profitmaximising firms to pay for professional forecasts when the better forecasts generated from. The disappointment climaxed with the papers of meese and rogoff 1983a, 1983b, who showed that a naive random walk model distinctly dominated received theoretical models in terms of predictive. Apr 19, 2010 the known, the unknown, and the unknowable in financial risk management. Microbased exchange rate forecasting, nber working papers 11042, national bureau of economic research, inc. We find that a random walk model performs as well as any estimated model at one to twelve month horizons for the dollarpound, dollarmark, dollaryen and. Thaler, a surv ey of behavioral finance, in george constantinides, milton. This time the random walk loses vox, cepr policy portal. Download for offline reading, highlight, bookmark or take notes while you read yield curve modeling and forecasting.
Demystifying the meese rogoff puzzle for the past 30 years international monetary economists have believed that exchange rate models cannot outperform the random walk in outofsample forecasting as a result of the 1983 paper written by richard meese and kenneth rogoff. Philippe bacchetta, toni beutler and eric van wincoop. The outofsample failure of empirical exchange rate. This result is behind the famous meese rogoff puzzle.
Philippe bacchetta, eric van wincoop and toni beutler. Kenneth saul ken rogoff born march 22, 1953 is an american economist and chess grandmaster. Pages can include considerable notesin pen or highlighterbut the notes cannot obscure the text. The latter category of riddles includes both the meeserogoff exchange rate forecasting puzzle and the baxterstockman neutrality of exchange rate regime puzzle. This finding been taken to imply the weakness of international economics and finance and raised the question as to why firms spend money on exchange rate forecasts and use them as an input in.
Exchangerate models national bureau of economic research. The six major puzzles in international macroeconomics. Kelly burns, research fellow at curtin graduate school of business for the past 30 years international monetary economists have believed that exchange rate models cannot outperform the random walk in outofsample forecasting as a result of the 1983 paper written by. Calculator navigation by mortimer rogoff and a great selection of related books, art and collectibles available now at. Since meese and rogoff 1983a,b, 1988, it has been well known that exchange rates are very difficult to predict using economic models. In their seminal work, meese and rogoff 1983a, 1983b estimate linear regression models based on standard macroeconomic variables. The known, the unknown, and the unknowable in financial. It will also be a useful resource for central banks and financial institutions. New york, ny wikipedia citation please see wikipedias template documentation for further citation fields that may be required. Demystifying the meeserogoff puzzle kindle edition by moosa, i. Measurement and theory advancing practice ebook written by francis x. A reconsideration of the meeserogoff puzzle a thesis submitted in fulfilment of the requirements for the degree of doctor of philosophy kelly burns b. The meeserogoff methodology meets the stock market cepr dp 6714. Use features like bookmarks, note taking and highlighting while reading demystifying the meese rogoff puzzle.
International financial remoteness and macroeconomic volatility with mark spiegel. The dynamic nelsonsiegel approach ebook written by francis x. We also address a variety of international pricing puzzles, including the purchasing power parity puzzle emphasized by rogoff, and what we term the exchangerate disconnect puzzle. Therefore, it does not license or charge permission fees for use of such material and cannot grant or deny permission to publish or otherwise distribute the material. Meese and rogoff 1988 reached the conclusion that, like nominal exchange rates, real exchange rates are disconnected from economic fundamentals, whereas two studies from the mid1990s argued that the random walk can be beaten for large datasets lothian and taylor 1996, jorion and sweeney 1996. Can parameter instability explain the meese rogoff puzzle. Can parameter instability explain the meeserogoff puzzle. The known, the unknown, and the unknowable in financial risk management. Their result that these models selection from handbook of exchange rates book. Moosa and kelly burns palgrave macmillan basingstoke, hampshire. The collection includes papers that study the behavior of exchange rates from the traditional macroeconomic and newer microstructure perspectives. After documenting the continued persistence of the meese.
A companion study meese and rogoff 1983 compared the outof. Demystifying the meeserogoff puzzle will appeal to academics with an interest in exchange rate economics and international monetary economics. Demystifying the meese rogoff puzzle kindle edition by moosa, i. Request pdf the meeserogoff puzzle the meeserogoff puzzle refers to the proposition that. Empirical modeling of exchange rate dynamics francis x.
A reconsideration of the meese rogoff puzzle a thesis submitted in fulfilment of the requirements for the degree of doctor of philosophy kelly burns b. The authors present compelling evidence, supported by their own measure. Politicians, commentators, and activists widely cited the paper in political debates over the effectiveness of austerity in fiscal policy for debtburdened. The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future. Demystifying the meese rogoff puzzle will appeal to academics with an interest in exchange rate economics and international monetary economics. Meese and rogoff 1988 reached the conclusion that, like nominal exchange rates, real exchange rates are disconnected from economic fundamentals, whereas two studies from the mid1990s argued that the random walk can be beaten for large datasets. Demystifying the meeserogoff puzzle for the past 30 years international monetary economists have believed that exchange rate models cannot outperform the random walk in outofsample forecasting as a result of the 1983 paper written by richard meese and kenneth rogoff. A guide to sovereign debt data, imf working papers 19195, international monetary fund. Structural exchange rate modeling has proven extremely difficult during the recent post1973 float.
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