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Model Uncertainty of Real Exchange Rate Forecast over Mid-term Horizons

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  • Munehisa Kasuya

    (Bank of Japan)

  • Izumi Takagawa

    (Bank of Japan)

Abstract

We investigate the significance of fundamentals variables and uncertainty of appropriate models in one-, two-, four-, and eight-quarter ahead forecasts of quarterly yen-dollar real exchange rates by using 16 fundamentals-based models and the random walk model. Our empirical results show significance of fundamentals variables in two-, four-, and eight-quarter ahead forecasts. Moreover, the reversible jump MCMC approach for uncertainty of appropriate models indicates that appropriate models change over both forecast-time-span and forecast period. This uncertainty could not be fully explained by the hypothesis that real exchange rates are ultimately governed by the true fundamentals-based model.

Suggested Citation

  • Munehisa Kasuya & Izumi Takagawa, 2001. "Model Uncertainty of Real Exchange Rate Forecast over Mid-term Horizons," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    • Handle: RePEc:boj:bojwps:01-e-23r
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    More about this item

    Keywords

    Exchange rates; Fundamentals; Prediction; Reversible Jump; Markov Chain Monte Carlo;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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