Abstract
Investigations of the forecasting power of econometric models of exchange rates by Meese and Rogoff (1983 and 1988) have led to the conclusion that these models can predict no better than the no-change forecast rule implied by the random walk model. This has often been interpreted as a confirmation of foreign exchange market efficiency. The present paper builds on models of real interest rate determination of the exchange rate. Estimates of the Dollar-DM exchange rate given here are stable in the face of changes of the data base, give predictions superior to the random walk model, and lead to the conclusion of foreign exchange market inefficiency.
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