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- Title
Testing the Taylor Model Predictability for Exchange Rates in Latin America.
- Authors
Moura, Marcelo L.
- Abstract
Exchange rates forecasting performance is tested by a model which incorporates endogenous monetary policy through a Taylor rule reaction function. Other usual monetary and equilibrium empirical exchange rate models are also evaluated for comparison purposes. Predictability is tested by comparing the models to a benchmark random walk specification. We contribute to the recent literature in many ways. First, we include models of forward-looking endogenous monetary policy to the exchange rate forecasting exercise, the Taylor model. Second, our data, set across countries, is uniform in terms of economies adopting both inflation targeting and a flexible exchange rate. Third, our study sheds light on exchange rate determinants for emerging economies: Brazil, Chile, Colombia, Peru and Mexico. Our results show strong predictability evidence for the Taylor model and indicate that assuming models of endogenous monetary policy and the present value of expected fundamentals is a rewarding strategy to model exchange rate determination.
- Subjects
LATIN America; MATHEMATICAL models of monetary policy; TAYLOR'S rule; FOREIGN exchange rates; MONETARY policy
- Publication
Open Economies Review, 2010, Vol 21, Issue 4, p547
- ISSN
0923-7992
- Publication type
Article
- DOI
10.1007/s11079-008-9098-0