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Simultaneous Equation Bias

In: Demystifying the Meese-Rogoff Puzzle

Author

Listed:
  • Imad A. Moosa

    (Monash University)

  • Kelly Burns

    (Curtin University)

Abstract

Simultaneous equation bias, which arises as a result of endogeneity of the explanatory variables, has been suggested as an explanation for the Meese-Rogoff puzzle. Endogeneity of macroeconomic variables may arise from the possibility of monetary policy feedback in the monetary model, which means that a model that incorporates endogeneity should produce better forecasts in terms of the magnitude of error. However, we find, with one exception, that the VAR models corresponding to the Frenkel-Bilson, Dornbusch-Frankel and Hooper-Morton static models do not produce significantly smaller RMSEs than that of the random walk.

Suggested Citation

  • Imad A. Moosa & Kelly Burns, 2015. "Simultaneous Equation Bias," Palgrave Macmillan Books, in: Demystifying the Meese-Rogoff Puzzle, chapter 8, pages 98-104, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-45248-1_8
    DOI: 10.1057/9781137452481_8
    as

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