Year-end Sale % OFF 
Abstract
This paper examines the effectiveness of the Taylor rule in contemporary times by investigating the exchange rate forecastability of selected four Organisation for Economic Co-operation and Development (OECD) member countries vis-à-vis the U.S. It employs various Taylor rule models with a non-drift random walk using monthly data from 1995 to 2019. The efficacy of the model is demonstrated by analyzing the pre- and post-financial crisis periods for forecasting exchange rates. The out-of-sample forecast results reveal that the best performing model is the symmetric model with no interest rate smoothing, heterogeneous coefficients and a constant. In particular, the results show that for the pre-financial crisis period, the Taylor rule was effective. However, the post-financial crisis period shows that the Taylor rule is ineffective in forecasting exchange rates. In addition, the sensitivity analysis suggests that a small window size outperforms a larger window size.
Highlights
Exchange rates have been a prime concern of the central banks, financial services firms and governments because they control the movements of the markets
The results show that the Taylor rule fundamentals models could accurately forecast the directional change of the U.S dollar (USD)/New Zealand dollar (NZD) exchange rate
The out-of-sample forecast is used to examine the application of the Taylor rule fundamentals in forecasting the exchange rates
Summary
Exchange rates have been a prime concern of the central banks, financial services firms and governments because they control the movements of the markets. They are said to be a determinant of a country’s fundamentals. One of the popular investigations into the exchange rate movements was made by Meese and Rogoff (1983) In their paper, they perform the out-of-sample exchange rates forecast during the post-Bretton Woods era. They perform the out-of-sample exchange rates forecast during the post-Bretton Woods era They found that the random walk model performs better with the exchange rate forecast than the economic fundamentals. Clarida and Taylor (1997) use the interest rate differential to forecast spot exchange rates. Mark and Sul (2001) find evidence of predictability for 13 out of 18 exchange rates using the monetary models
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
