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Predicting real exchange rates from real interest rate differentials and net foreign asset stocks: evidence for the mark/dollar parity

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  • Meier, Carsten-Patrick

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.

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  • Meier, Carsten-Patrick, 1999. "Predicting real exchange rates from real interest rate differentials and net foreign asset stocks: evidence for the mark/dollar parity," Kiel Working Papers 962, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:962
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    Cited by:

    1. Gottschalk, Jan & Döpke, Jörg & Kamps, Christophe, 2001. "Sources of Euro Real Exchange Rate Fluctuations: What Is Behind the Euro Weakness in 1999-2000?," Kiel Working Papers 1050, Kiel Institute for the World Economy (IfW Kiel).
    2. Norbert Berthold & Rainer Fehn, 2002. "Arbeitsmarktpolitik in der Europäischen Währungsunion," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 3(3), pages 317-345, August.
    3. Gern, Klaus-Jürgen, 2000. "Euroland: Peak of the upswing – Little evidence of a new economy," Kiel Discussion Papers 369, Kiel Institute for the World Economy (IfW Kiel).
    4. Gern, Klaus-Jürgen, 2000. "Euroland: Konjunktur überschreitet Höhepunkt: wenig Anzeichen für eine New Economy," Open Access Publications from Kiel Institute for the World Economy 2501, Kiel Institute for the World Economy (IfW Kiel).
    5. Berthold, Norbert & Fehn, Rainer, 2000. "Arbeitsmarktpolitik in der Europäischen Währungsunion," Discussion Paper Series 38, Julius Maximilian University of Würzburg, Chair of Economic Order and Social Policy.

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    More about this item

    Keywords

    real interest rates; net foreign assets; nontradables prices; fixed/floating exchange rate regimes; real exchange rates;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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