Exchange rate determination and intermarket order flow. We also address a variety of international pricing puzzles, including the purchasing power parity puzzle emphasized by rogoff, and what we term the exchangerate disconnect puzzle. Demystifying the meeserogoff puzzle kindle edition by moosa, i. Rogoffthe outof sample failure of empirical exchange rate models. Kelly burns, research fellow at curtin graduate school of business for the past 30 years international monetary economists have believed that exchange rate models cannot outperform the random walk in outofsample forecasting as a result of the 1983 paper written by. This study compares the outofsample forecasting accuracy of various structural and time series exchange rate models. In this paper we evaluate whether parameter instability can account for this puzzle. Demystifying the meeserogoff puzzle for the past 30 years international monetary economists have believed that exchange rate models cannot outperform the random walk in outofsample forecasting as a result of the 1983 paper written by richard meese and kenneth rogoff. However, the recent literature has identified new predictors and models that claim to forecast exchange rates gourinchas and rey 2007, mark 1995, and molodtsova and papell 2009, among others. Meese and rogoff 1988 reached the conclusion that, like nominal exchange rates, real exchange rates are disconnected from economic fundamentals, whereas two studies from the mid1990s argued that the random walk can be beaten for large datasets lothian and taylor 1996, jorion and sweeney 1996. The particular setup they examine is summarized by this group of. Pdf can structural change explain the meeserogoff puzzle. Measurement and theory advancing practice ebook written by francis x.
This proposition is regarded as a puzzle because it does not make much sense for profitmaximising firms to pay for professional forecasts when the better forecasts generated from. It will also be a useful resource for central banks and financial institutions. The messe rogoff puzzle has been a debatable topic since 1983 when richard meese and kenneth rogoff demonstrated that no exchange rate model can outperform the random walk in outofsample forecasting. Nov 14, 20 since meese and rogoff 1983a,b, 1988, it has been well known that exchange rates are very difficult to predict using economic models. Chapter in nber book nber international seminar on macroeconomics 2009 2010, lucrezia reichlin and kenneth d. About this book introduction marking the culmination of their extensive research into the meese rogoff puzzle, moosa and burns challenge the orthodoxy by demonstrating that the naive random walk model can be outperformed by exchange rate models when forecasting accuracy is measured by metrics that do not rely exclusively on the magnitude of. The paper also provides additional support for the meese and rogoff 1983 1, 1988 2 random walk model, and suggests that the continued search of exchange rate forecasting models are. Moosa and kelly burns palgrave macmillan basingstoke, hampshire. Philippe bacchetta, eric van wincoop, toni beutler.
Exchangerate models national bureau of economic research. A guide to sovereign debt data, imf working papers 19195, international monetary fund. This pdf is a selection from a published volume from the. International financial remoteness and macroeconomic volatility with mark spiegel. Politicians, commentators, and activists widely cited the paper in political debates over the effectiveness of austerity in fiscal policy for debtburdened. The popular scholarly exercise of evaluating exchange rate forecasting models relative to a random walk was stimulated by the wellcited meese and rogoff 1983 paper.
A companion study meese and rogoff 1983 compared the outof. Demystifying the meese rogoff puzzle for the past 30 years international monetary economists have believed that exchange rate models cannot outperform the random walk in outofsample forecasting as a result of the 1983 paper written by richard meese and kenneth rogoff. This time the random walk loses vox, cepr policy portal. Thaler, a surv ey of behavioral finance, in george constantinides, milton. Richard k lyons this paper compares the true, exante forecasting performance of a microbased model against both a standard macro model and a random walk. The known, the unknown, and the unknowable in financial risk management. The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. Pages can include considerable notesin pen or highlighterbut the notes cannot obscure the text. A reconsideration of the meeserogoff puzzle a thesis submitted in fulfilment of the requirements for the degree of doctor of philosophy kelly burns b.
A reconsideration of the meese rogoff puzzle a thesis submitted in fulfilment of the requirements for the degree of doctor of philosophy kelly burns b. The collection includes papers that study the behavior of exchange rates from the traditional macroeconomic and newer microstructure perspectives. Demystifying the meese rogoff puzzle kindle edition by moosa, i. Since meese and rogoff 1983a,b, 1988, it has been well known that exchange rates are very difficult to predict using economic models.
Empirical modeling of exchange rate dynamics francis x. The known, the unknown, and the unknowable in financial risk. We find that a random walk model performs as well as any estimated model at one to twelve month horizons for the dollarpound, dollarmark, dollaryen and tradeweighted dollar exchange rates. Lawhons, gdfp school of economics, finance and marketing college of business rmit university january 2014. Burns, kelly 2015 for the past 30 years international monetary economists have believed that exchange rate models cannot outperform the random walk in outofsample forecasting as a result of the 1983 paper written by richard meese and. Demystifying the meeserogoff puzzle will appeal to academics with an interest in exchange rate economics and international monetary economics. This finding been taken to imply the weakness of international economics and finance and raised the question as to why firms spend money on exchange rate forecasts and use them as an input in. Meese university of california at berkeley, berkeley, ca 94720, usa kenneth rogoff board of governors of the federal reserve system, washington, dc 20551, usa received july 1981, revised version received april 1982 this study compares the outofsample forecasting accuracy of various structural and time series exchange rate models. In their seminal work, meese and rogoff 1983a, 1983b estimate linear regression models based on standard macroeconomic variables. The central claim in this paper is that by explicitly introducing costs of international trade narrowly, transport costs, but more broadly, tariffs, nontariff barriers, and other trade costs, one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twentyfive years. Structural exchange rate modeling has proven extremely difficult during the recent post1973 float. Demystifying the meese rogoff puzzle will appeal to academics with an interest in exchange rate economics and international monetary economics. A draft is available as a pdf file, as are overhead slides.
Request pdf the meeserogoff puzzle the meeserogoff puzzle refers to the proposition that. Michael melvin, john prins and duncan shand, blackrock abstract. Taken together, these papers provide sound evidence about the effects of real and monetary factors on exchange rates and extend the analyses of exchange rates and international macroeconomics by. The latter category of riddles includes both the meeserogoff exchange rate forecasting puzzle and the baxterstockman neutrality of exchange rate regime puzzle. Kenneth saul ken rogoff born march 22, 1953 is an american economist and chess grandmaster. The meese and rogoff 1983a,b framework is used to investigate the forecasting power of order flow and it is shown that the order flow specifications reduce rmses, relative to a random walk, for virtually all exchange rates and sampling frequencies. Philippe bacchetta, toni beutler and eric van wincoop.
The disappointment climaxed with the papers of meese and rogoff 1983a, 1983b, who showed that a naive random walk model distinctly dominated received theoretical models in terms of predictive. Their result that these models selection from handbook of exchange rates book. The authors present compelling evidence, supported by their own measure. This criterion was popularized by the seminal work of meese and rogoff. This result is behind the famous meese rogoff puzzle. Cabot professor of public policy and professor of economics at harvard university. Use features like bookmarks, note taking and highlighting while reading demystifying the meese rogoff puzzle. The dynamic nelsonsiegel approach ebook written by francis x. After documenting the continued persistence of the meese. The known, the unknown, and the unknowable in financial. International finance and macroeconomics, asset pricing. Pdf empirical exchange rate models of the seventies. Exchange rates and international macroeconomics, frenkel. Therefore, it does not license or charge permission fees for use of such material and cannot grant or deny permission to publish or otherwise distribute the material.
Using rolling regressions, they show that forecasts based on these models do not outperform forecasts based on the current exchange rate, even when the actual future. Microbased exchange rate forecasting, nber working papers 11042, national bureau of economic research, inc. The collection includes papers that study the behavior of exchange rates from the traditional macroeconomic and. The outofsample failure of empirical exchange rate. New york, ny wikipedia citation please see wikipedias template documentation for further citation fields that may be required. Download for offline reading, highlight, bookmark or take notes while you read yield curve modeling and forecasting.
Calculator navigation by mortimer rogoff and a great selection of related books, art and collectibles available now at. Pdf a simple model for expected exchange rate es of. Apr 19, 2010 the known, the unknown, and the unknowable in financial risk management. Can parameter instability explain the meeserogoff puzzle. We consider a theoretical reducedform relationship between the exchange rate and fundamentals in which parameters are either constant or time varying. The seminal article by meese and rogoff 1983 points that the exchange rates. Philippe bacchetta, eric van wincoop and toni beutler. Use features like bookmarks, note taking and highlighting while reading demystifying the meeserogoff puzzle. Download for offline reading, highlight, bookmark or take notes while you read the known, the. Rogoff finding in the latest data set, bacchetta et al. We find that a random walk model performs as well as any estimated model at one to twelve month horizons for the dollarpound, dollarmark, dollaryen and. Working papers articles chapters books editorship working papers.
The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future. Download for offline reading, highlight, bookmark or take notes while you read the known, the unknown, and the unknowable in. Inspire a love of reading with prime book box for kids discover delightful childrens books with prime book box, a. This volume, presenting some of the finest new research on exchange rates and international macroeconomics, contains papers and critical commentary by thirtytwo leading economists. The meeserogoff methodology meets the stock market cepr dp 6714.
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