Taylor Rule Exchange Rate Forecasting During the Financial Crisis / Tanya Molodtsova, David Papell.

Format:

Book

Author/Creator:

Molodtsova, Tanya.

Contributor:

National Bureau of Economic Research.

Papell, David.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18330.

NBER working paper series no. w18330

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.

Notes:

Print version record

August 2012.