TY  - JOUR
AU  - Cheung,Yin-Wong
AU  - Chinn,Menzie D.
TI  - Integration, Cointegration and the Forecast Consistency of Structural Exchange Rate Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5943
PY  - 1997
Y2  - February 1997
UR  - http://www.nber.org/papers/w5943
L1  - http://www.nber.org/papers/w5943.pdf
N1  - Author contact info:
Yin-Wong Cheung
Department of Economics
University of California
Santa Cruz, CA  95064
E-Mail: cheung@ucsc.edu

Menzie D. Chinn
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI 53706
Tel: 608/262-7397
Fax: 608/262-2033
E-Mail: mchinn@lafollette.wisc.edu
AB  - Exchange rate forecasts are generated using some popular monetary models of exchange rates in conjunction with several estimation techniques.  We propose an alternative set of criteria for evaluating forecast rationality which entails the following requirements: the forecast and the actual series i) have the same order of integration, ii) are cointegrated, and iii) have a cointegrating vector consistent with long run unitary elasticity of expectations.  When these conditions hold, we consider the forecasts to be  consistent.' We find that it is fairly easy for the generated forecasts to pass the first requirement.  However, according to the Johansen procedure, cointegration fails to hold the farther out the forecasts extend.  At the one year ahead horizon, most series and their respective forecasts do not appear cointegrated.  Of the cointegrated pairs, the restriction of unitary elasticity of forecasts with respect to actual appears not to be rejected in general.  The exception to this pattern is in the case of the error correction models in the longer subsample.  Using the Horvath-Watson procedure, which imposes a unitary coefficient restriction, we find fewer instances of consistency, but a relatively higher proportion of the identified cases of consistency are found at the longer horizons.
ER  -