Forecasting

Abstract

To judge the quality of the overshooting model from section B. the forecasting results of this model were compared with the out-of-sample forecasting results of the naive random walk model. Since the exchange rate is probably driven by “news” and different causes for excessive exchange rate movements, one cannot expect to get good forecasting results for structural exchange rate models. Despite these theoretical considerations, the out-ofsample forecasting results of the structural models were considered disappointing because the structural models did not perform better than the simple random walk model. Especially Meese and Rogoff (1983ab, 1988) showed this for different versions of the monetary model. This paper tries to improve upon these results by estimating the modified monetary model from section B. with Johansen’s ML procedure.