Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe global …nancial crisis has led to a revival of the empirical literature on current account imbalances. This paper contributes to that literature by investigating the importance of evaluating model and parameter uncertainty prior to reaching any …rm conclusion. We explore three alternative econometric strategies: examining all models, selecting a few, and combining them all. Out of thousands (or indeed millions) of models a story emerges. Prior to the …nancial crisis, current account positions of major economies such as the US, UK, Japan and China were not aligned with fundamentals. Non-technical summary Prior to 2008 some leading economists warned about the potential risks from current account imbalances in the major economies. The …nancial crisis highlighted the key role of country interlinkages as instability spread from the United States to the rest of the world, though not via the exchange rate channel, as had been expected. Subsequently there has been an important debate on whether current account imbalances are an important factor for emergence of bubbles and the transmission of …nancial crisis internationally.There are di¤erent approaches to assess current account imbalances. The classic theoretical approach to model current accounts is based on an intertemporal optimization. This methodology has been criticized for not being validated empirically. Therefore, the standard intertemporal current account model has been extended in many directions by introducing additional relevant factors that could a¤ect consumptions and savings decisions. Di¤erent models, however, point to di¤erent predictions on the relevant current account determinants. This choice could be arbitrary and in ‡uence the overall assessment.In this paper we show that there are potentially thousands (or even million) of plausible current account models, depending on the choice of fundamentals. We therefore look for robust conclusions following three di¤erent econometric strategies. The …rst consists in examining all possible models and verifying if there are some common features which could be identi…ed across all of them. The second route aims at choosing the best model based on both economic and statistical criteria. A …nal third route considers the information content of all models by applying Bayesian model combination techniques. We explore a particularly simple and appealing approach that is not dependent on any theoretical priors.All three...
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe run a real exchange rate forecasting "horse race", which highlights that two principles hold. First, forecasts should not replicate the high volatility of exchange rates observed in sample. Second, models should exploit the mean reversion of the real exchange rate over long horizons. Abiding by these principles, an open-economy DSGE model performs well in real exchange rate forecasting. However, it fails to forecast nominal exchange rates better than the random walk. We find that the root cause is its inability to predict domestic and foreign inflation. This shortcoming leads us toward simpler ways to outperform the random walk. Non-technical summaryEconomic theory provides policymakers with clear guidance on how the competitiveness channel operates in the aftermath of a wide set of disturbances, such as monetary, productivity, risk premium or foreign shocks. However, there is a cloud hanging over this aspect of international economics, namely that these conjectures may have limited empirical significance, given the systematic failure of macro models to beat even the naïve random walk (RW) in exchange rate forecasting (the "exchange rate disconnect puzzle"). The question then naturally arises of whether international macro models are rich enough to be meaningful. Layers of complexity are typically added to improve their realism. For example, including in the features of the model the currency of trade invoicing may help the model to capture better the degree of exchange rate pass-through. Similarly, distinguishing the currency of denomination of asset and liabilities, may lead to a better description of the dynamics of external debt, which may be essential to better understand real exchange rate movements in emerging countries. On the other hand, imposing too many restrictions on the data generating process, either theoretically or in the estimation phase, may prove disadvantageous from a pure forecasting perspective given the higher number of estimated parameters. Every cloud has a silver lining, however. The exchange rate disconnect puzzle has spurred economists to look for new directions of research with success. Openeconomy dynamic stochastic general equilibrium (DSGE) models are clearly a major accomplishment from the theoretical perspective. The empirical literature has also shown why, by properly accounting for estimation error, exchange rate models may be better than we usually think. The consen...
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