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    Demystifying the Meese–Rogoff puzzle: structural breaks or measures of forecasting accuracy?

    Access Status
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    Authors
    Burns, Kelly
    Moosa, I.
    Date
    2017
    Type
    Journal Article
    
    Metadata
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    Citation
    Burns, K. and Moosa, I. 2017. Demystifying the Meese–Rogoff puzzle: structural breaks or measures of forecasting accuracy? Applied Economics. 49 (48): pp. 4897-4910.
    Source Title
    Applied Economics
    DOI
    10.1080/00036846.2017.1296550
    ISSN
    0003-6846
    School
    Curtin Graduate School of Business
    URI
    http://hdl.handle.net/20.500.11937/53358
    Collection
    • Curtin Research Publications
    Abstract

    Structural breaks have been suggested by several economists as a possible explanation for the Meese–Rogoff puzzle, in the sense that an exchange rate model can outperform the random walk in terms of the out-of-sample forecasting error if the period under investigation is free of structural breaks. The results indicate that structural breaks cannot explain the inability of the flexible price monetary model to outperform the random walk. The only plausible explanation for the Meese–Rogoff puzzle is that forecasting accuracy is traditionally assessed by magnitude-only measures. When forecasting accuracy is assessed by alternative measures that do not rely exclusively on the magnitude of error, the monetary model can outperform the random walk regardless of the presence or otherwise of structural breaks.

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