Abstract
In this article the out-of-sample forecasting performance of exchange rate determination is examined without imposing the restriction that coefficients are fixed over time. Both fixed and variable coefficient versions of conventional structural models are considered, with and without a lagged dependent variable. A Variable Parameter Regression (VPR) technique based on recursive application of the Kalman filter is used to improve the predictive performance of a class oi monetary exchange rate models.
Highlights
The debt standstill and the sanctions issue in South Africa have, inter alia, emphasized the need for empirical methodology in econometrics to deal with parameter variation over time
The results presented above do not answer the question of whether the Variable parameter regression (VPR) model for exchange rates is significantly better than the other models in the primary criterion, root mean square error, the finding that the VPR model almost invariably has the lowest root mean squared error (RMSE) over all horisons, 1970-2 3,50
The main result of this study is that once one is willing to relax the assumption of fixed regression slopes, it is possible to estimate structural models of exchange rate determination which perform better than the conventional model in predicting out-of-sample values of exchange rates
Summary
In this article the out-of-sample forecasting performance of exchange rate determination is examined without imposing the restriction that coefficients are fixed over time. Both fixed and variable coefficient versions of conventional structural models are considered, with and without a lagged dependent variable. A Variable Parameter Regression (VPR) technique based on recursive application of the Kalman filter is used to improve the predictive performance of a class oi monetary exchange rate models. Beide die konstante en veranderlike koeffisientvoorstellings vir konvensionele strukturele modelle word oorweeg, met en sonder 'n sloeringsveranderlike. 'n Veranderlike Regressie Parameter (VRP)tegniek, gebaseer op die rekursiewe toepassing van die Kalman-filter word gebruik om die vooruitskattingsvermoe van 'n sekere klas van monetere wisselkoersmodelle te bepaal Beide die konstante en veranderlike koeffisientvoorstellings vir konvensionele strukturele modelle word oorweeg, met en sonder 'n sloeringsveranderlike. 'n Veranderlike Regressie Parameter (VRP)tegniek, gebaseer op die rekursiewe toepassing van die Kalman-filter word gebruik om die vooruitskattingsvermoe van 'n sekere klas van monetere wisselkoersmodelle te bepaal
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