Can Parameter Instability Explain the Meese-Rogoff Puzzle?

Details

Serval ID
serval:BIB_D73986152D96
Type
Inproceedings: an article in a conference proceedings.
Collection
Publications
Institution
Title
Can Parameter Instability Explain the Meese-Rogoff Puzzle?
Title of the conference
NBER International Seminar on Macroeonomics 2009
Author(s)
Bacchetta P., van Wincoop E., Beutler T., Chinn M.D., Giannone D.
Publisher
University of Chicago Press
ISBN
0-226-70750-4
978-0-226-70749-5
Publication state
Published
Issued date
06/2010
Peer-reviewed
Oui
Editor
Reichlin L., West K.
Volume
6
Series
NBER Book Series
Pages
125-173
Language
english
Abstract
The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. This result is behind the famous Meese-Rogoff puzzle. In this paper we evaluate whether parameter instability can account for this puzzle. We consider a theoretical reduced-form relationship between the exchange rate and fundamentals in which parameters are either constant or time varying. We calibrate the model to data for exchange rates and fundamentals and conduct the exact same Meese-Rogoff exercise with data generated by the model. Our main finding is that the Impact of time-varying parameters on the prediction performance either is very small or goes in the wrong direction. To help interpret the findings, we derive theoretical results on the impact of time-varying parameters on the out-of-sample forecasting performance of the model. We conclude that it is not time-varying parameters, but rather small sample estimation bias, that explains the Meese-Rogoff puzzle.
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Create date
18/02/2011 12:29
Last modification date
20/08/2019 15:56
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