Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting

This paper compares the true, ex ante forecasting performance of a micro-based model against both a standard macro model and a random walk. In contrast to existing literature, which is focused on longer horizon forecasting, we examine forecasting over horizons from one day to one month (the one-month horizon being where micro and macro analysis begin to overlap). Over our three-year forecasting sample, we find that the micro-based model consistently outperforms both the random walk and the macro model. Micro-based forecasts account for almost 16 percent of the sample variance in monthly spot rate changes. These results provide a level of empirical validation as yet unattained by other models…