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Exchange rate models and their forecasting power: an interventionist approach
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2013 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

In this thesis, we present a simple framework of exchange-rate modelling, the fexible-price monetary model, and extend it by including governmental intervention, a process whereby the authorities attempt to control the uctuations of the exchange rate by buying or selling their own currency against others. The aim of our work is to determine if including intervention in the monetary model does improve its forecasting abilities. Government ntervention is modelled using actual intervention data from the Japanese Finance Ministry and the Federal Reserve. We focus on a monthly dataset spanning from 1994 till 2012. The empirical work we perform starts by analysing the properties of our time series, we nd a cointegrating relationships among the macroeconomic variables (exchange rate, money supply and real output). The the model is then estimated using a Vector Error Correction Model (VECM), and further used to generate forecasts at dierent horizons. Our results seems to point out towards the fact that, including intervention in the monetary model does not seem to improve its forecasting ability, however, its Vector Autoregressive counterpart (VAR), excluding intervention seems to produce better results that a random walk, along dierent measures.

Place, publisher, year, edition, pages
Keyword [en]
exchange rate, monetary model, intervention, cointegration, forecasting
National Category
URN: urn:nbn:se:uu:diva-198257OAI: oai:DiVA.org:uu-198257DiVA: diva2:615564
Social and Behavioural Science, Law
Available from: 2013-04-11 Created: 2013-04-11 Last updated: 2013-04-15Bibliographically approved

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