NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Predictability of Real Exchange Rate Changes in the Short and Long Run

Robert E. Cumby, John Huizinga

NBER Working Paper No. 3468
Issued in October 1990
NBER Program(s):   ITI   IFM

Nominal exchange rates do not move to offset differences in inflation rates on a month to month, quarter to quarter, or even year to year basis, resulting in sizable real exchange rate changes. Are these changes predictable? We address this question in three ways. First, we describe a variety of tests of predictability and explain how the different tests are related. Next, we implement the tests for the U.S. dollar relative to four currencies and find statistically significant evidence that real exchange rate changes are predictable. Finally, we examine whether the predictability is of an economically interesting magnitude.

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Document Object Identifier (DOI): 10.3386/w3468

Published: Japan and the World Economy, Volume 3, pp. 17-38, 1991

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