Kiel Working Papers, Kiel Institute for World Economics
No 962:
Predicting Real Exchange Rates from Real Interest Rate Differentials and Net Foreign Asset Stocks: Evidence for the Mark/Dollar Parity
Carsten-Patrick Meier
Abstract: When nontraded goods prices are accounted for consistently
and genuine stock data on bilateral foreign asset holdings is employed, a
modified sticky-price exchange rate model by far outperforms the benchmark
random walk-model in empirically forecasting the D-mark/dollar parity out
of sample. Superior forecast performance holds both over long horizons and
from the first step. Extending the sample back to the Bretton Woods period
leaves the model's parameters and its performance virtually unaffected. By
implication, the explanatory variables of the model show a pattern of
exchange rate regime-dependent volatility that is similar to that of the
real exchange rate itself.
Keywords: Real exchange rates; Real interest rates; Net foreign assets; Nontradables prices; Fixed/floating exchange rate regimes; (follow links to similar papers)
JEL-Codes: F31; F32; (follow links to similar papers)
37 pages, December 1999
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