NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Taylor Rule Exchange Rate Forecasting during the Financial Crisis

Tanya Molodtsova, David H. Papell

Chapter in NBER book NBER International Seminar on Macroeconomics 2012 (2013), Francesco Giavazzi and Kenneth D. West, organizers (p. 55 - 97)
Conference held June 15-16, 2012
Published in August 2013 by University of Chicago Press
© 2013 by the National Bureau of Economic Research
in NBER Book Series NBER International Seminar on Macroeconomics

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.

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Document Object Identifier (DOI): 10.1086/669584

This 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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