Theoretical and Empirical Exchange Rate Models: Do they aim to forecast the Quetzal?

Resumen

The forecasting performance of a wide variety of theoretical and empirical exchange rate models is tested against the random walk specication to determine their assessment in predicting the quetzals exchange rate. In e⁄ect, applying a modied version of Cheung, Chinn and Garca-Pascual (2004) and Meese and Rogo⁄(1983), the Purchasing Power Parity, the Interest Rate Parity Condition, the Monetary Models in their Flexible and Sticky-Price versions, the Portfolio Balance, and a Behavioral Empirical Exchange Rate (BEER) model are tested against the simple random walk specication. Such models are estimated using recursive regression methodology based on quarterly data for the period 1995Q1-2009Q4 for the quetzals exchange vis--vis the U.S. dollar. Estimations are performed based on a trend-gap, and an error-correction specication to contrast short vs. long run prediction performance, which is evaluated up to eight period ahead forecasts for all model specications. Di⁄erent from results obtained in empirical research, forecasts provided by most specications in the very short run (up to 2 quarters ahead), mainly the BEER specication, consistently outperform those obtained from the random walk model.