Taylor Rule Exchange Rate Forecasting during the Financial Crisis
Chapter in NBER book NBER International Seminar on Macroeconomics 2012 (2013), Francesco Giavazzi and Kenneth D. West, organizers (p. 55 - 97)
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 to 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.This chapter is no longer available for free download, since the book has been published. To obtain a copy, you must buy the book.
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Document Object Identifier (DOI): 10.1086/669584This chapter first appeared as NBER working paper w18330, Taylor Rule Exchange Rate Forecasting During the Financial Crisis, Tanya Molodtsova, David Papell
Commentary on this chapter:
Comment, Michael W. McCracken
Comment, Barbara Rossi
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