The Taylor rule and forecast intervals for exchange rates

Jian Wang and Jason Wu ()

No 22, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper attacks the Meese-Rogoff (exchange rate disconnect) puzzle from a different perspective: out-of-sample interval forecasting. Most studies in the literature focus on point forecasts. In this paper, we apply Robust Semi-parametric (RS) interval forecasting to a group of Taylor rule models. Forecast intervals for twelve OECD exchange rates are generated and modified tests of Giacomini and White (2006) are conducted to compare the performance of Taylor rule models and the random walk. Our contribution is twofold.> ; First, we find that in general, Taylor rule models generate tighter forecast intervals than the random walk, given that their intervals cover out-of-sample exchange rate realizations equally well. This result is more pronounced at longer horizons. Our results suggest a connection between exchange rates and economic fundamentals: economic variables contain information useful in forecasting the distributions of exchange rates. The benchmark Taylor rule model is also found to perform better than the monetary and PPP models. Second, the inference framework proposed in this paper for forecast-interval evaluation can be applied in a broader context, such as inflation forecasting, not just to the models and interval forecasting methods used in this paper.

JEL-codes: C14 C53 F31 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-for, nep-ifn and nep-mon
Note: Published as: Wang, Jian and Jason J. Wu (2012), "The Taylor Rule and Forecast Intervals for Exchange Rates," Journal of Money, Credit and Banking 44 (1): 103-144.
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: The Taylor Rule and Forecast Intervals for Exchange Rates (2012)
Working Paper: The Taylor rule and forecast intervals for exchange rates (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:22

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