Balance of payments flows and exchange rate prediction in Japan
Entity
UAM. Departamento de Análisis Económico, Teoría Económica e Historia EconómicaPublisher
UAM. Departamento de Análisis Económico, Teoría Económica e Historia EconómicaDate
2012-03Serie/Num.
Economic Analysis Working Paper Series. 9/2012ISSN
1885-6888Subjects
Balance of payments flows; International investment position; Exchange rate prediction; Out-of-sample prediction; Random walk; EconomíaAbstract
Monetary models of exchange rates tend to focus on inflation differentials
to explain exchange rate movements. This paper assesses the ability of
currency flows to predict exchange rate changes. The focus is on Japan. Currency
flows are assumed to depend on the level of the current account and on
the international investment position, where the latter is used as a proxy for
international debt repayments. A state space model is used to predict simultaneously
the exchange rate and its determinants. Using rolling regressions
and out-of-sample predictions, it is shown that a model featuring currency
flows can predict the direction of exchange rate movements better than a random
walk (with or without drift). However, as happens with standard macroeconomic
models, the model is not able to outperform a random walk in
terms of the mean square prediction error criterion
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Google Scholar:Müller-Plantenberg, Nikolas A.
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