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Charles Engel
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1180 Observatory Drive Madison, WI 53706-1393
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Phone: (608) 262-3697 FAX: (608) 262-2033 Contact me at cengel@ssc.wisc.edu |
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Wisconsin Economics Department |
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Here are a couple of figures from the new
working paper with Steve Pak Yeung Wu: "Exchange Rate Models are Better
Than You Think, and Why They Didn't Work in the Old Days"
In the first figure, we have estimated a single-equation
model for monthly changes in the exchange rate with traditional monetary
policy-related variables (real interest rates and expected inflation),
variables related to risk (corporate bond spread, convenience yield, changes in
net external debt) and the lagged real exchange rate. Here we have cumulated
the fitted values of the regression and then adjusted the average to equal the
sample average. [Note these are not forecasting equations - they relate current
exchange rates to current fundamentals.]
Of course, it well known that these models did not
fit in the past. Here are plots of the F-statistic for joint significance of
the fundamentals and R2 for 20-year rolling samples beginning in
March 1973 (and these are fit without the convenience yield, as that data was
unavailable back to the start of the sample.)