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Predictability of Exchange Rates With Taylor Rule Fundamentals: Evidence from Inflation-Targeting Emerging Countries

Author

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  • Joseph D. Alba
  • Donghyun Park
  • Taojun Xie

Abstract

We investigate the out-of-sample predictability of U.S. dollar exchange rates with Taylor rule fundamentals in thirteen emerging countries with inflation-targeting monetary policy regimes. We find some evidence of out-of-sample exchange rate predictability for Brazil, Czech Republic, Hungary, Philippines, Thailand, and South Africa. Plots of the coefficients of U.S. inflation and Philippine inflation predict the direction of the U.S. dollar–Philippine peso exchange rates to be opposite to that predicted by the Taylor principle.

Suggested Citation

  • Joseph D. Alba & Donghyun Park & Taojun Xie, 2015. "Predictability of Exchange Rates With Taylor Rule Fundamentals: Evidence from Inflation-Targeting Emerging Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(4), pages 714-728, July.
    • Handle: RePEc:mes:emfitr:v:51:y:2015:i:4:p:714-728
    DOI: 10.1080/1540496X.2015.1046344
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    Cited by:

    1. Hyein Shim & Hyeyoen Kim & Sunghyun Kim & Doojin Ryu, 2016. "Testing the relative purchasing power parity hypothesis: the case of Korea," Applied Economics, Taylor & Francis Journals, vol. 48(25), pages 2383-2395, May.
    2. Haskamp, Ulrich, 2017. "Forecasting exchange rates: The time-varying relationship between exchange rates and Taylor rule fundamentals," Ruhr Economic Papers 704, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Yutaka Kurihara, 2017. "Taylor Rule During the Zero or Low Interest Rate Era: The Recent Japanese Case," Applied Economics and Finance, Redfame publishing, vol. 4(1), pages 1-8, January.

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