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• W2000672205 abstract "Recent research suggests that there are many favourable features of the asset-pricing model of exchange rates incorporating Taylor rules. Against this back-ground, this thesis focuses on the relationship between the exchange rate andTaylor rule fundamentals. The introductory chapter provides a short summaryof the most relevant literature, and explains the connections between the mainchapters. In chapter 2, we mainly follow Engel and West's (2006) framework ofthe asset-pricing model of exchange rate incorporating Taylor rules to forecastthe yen/dollar exchange rate. The central research question is whether this typeof model has any predictive power with respect to the exchange rate.In chapter 3, a more detailed analysis of the properties of Taylor rules is un-dertaken. The main idea derives from one of the assumptions made in chapter 2,concerning the structural stability of the Taylor rules. If there are unknown struc-tural breaks, the estimation of the Taylor rule is likely to be biased. Furthermore,both theoretical and empirical studies suggest that the Taylor rule in advancedeconomies is asymmetric. If a central bank is minimizing an asymmetric lossfunction in which negative and positive ination- and output-gap deviation are,respectively, assigned di�erent weights, then a nonlinear Taylor rule is optimal.Hence we set out to identify any structural breaks in the Taylor rule, and touncover the extent to which nonlinearity plays a role in Taylor rule modelling. Inour empirical study, a threshold model introduced by Caner and Hansen (2004) isused to measure whether the Taylor rules are nonlinear or not, in order to explainthe existence of asymmetry of Taylor rules.Chapter 4 compares the performance of the traditional monetary model andthe Taylor rule model in terms of out-of-sample forecasting performance. A keystudy is by Molodtsova and Papell (2009) who derive a simple version of theTaylor rule model and demonstrate that it can outperform a variety of monetarymodels as well as the naive random walk, on the basis of the state-of-the-artgoodness-of-�t statistic developed by Clark and West (2006) (the CW statistic).It is of considerable interest to discover whether Molodtsova and Papell's (2009)results are driven by the superior predictability of the Taylor rule fundamentals,or by features of the CW statistic. To address this question, the sterling/dollarexchange rate for the period 1975-2010 is investigated. A detailed analysis ofthe CW statistic, including Monte-Carlo simulations, is conducted. In addition,a variety of estimators are used, including the Vector Error Correction Method(VECM) which is used to generate the out-of-sample forecast. Also, a numberof goodness-of-�t measures (in addition to CW) are used for comparing the pre-dictability of the Taylor rule model with traditional monetary models. The overall�nding is that the out-of-sample forecasting predictability of the sterling/dollarexchange rate obtained by the Taylor rule model is not as signi�cant as we ex-pect by using a variety of goodness-of-�t measures, but the traditional monetarymodels have certain predictive power if VECM is applied." @default.
• W2000672205 created "2016-06-24" @default.
• W2000672205 creator A5077505268 @default.
• W2000672205 date "2012-11-01" @default.
• W2000672205 modified "2023-09-23" @default.
• W2000672205 title "Can Taylor rule fundamentals predict exchange rates" @default.
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• W2000672205 hasPublicationYear "2012" @default.
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