Do Divisia monetary aggregates help forecast exchange rates in a negative interest rate environment?

Jane Binner, Luis Molinas, Meng Tong

Research output: Contribution to conference (unpublished)Paperpeer-review

Abstract

ABSTRACT
This paper contributes to the literature as the first work of its kind to examine the role and importance of Divisia monetary aggregates and concomitant User Cost Price indices as superior monetary policy forecasting tools in a negative interest rate environment.

We compare the performance of Divisia monetary aggregates with traditional
simple-sum aggregates in several theoretical models and in a Bayesian VAR to forecast the exchange rates between the euro, the dollar and yuan at various horizons using quarterly data. We evaluate their performance against that of a random walk using two criteria: Root Mean Square Error ratios and the Clark-West statistic. We find that, under a free-floating exchange regime, superior Divisia monetary aggregates outperform their simple sum counterparts and the benchmark random walk in a negative interest rate environment, consistently.
Original languageEnglish
Publication statusPublished - 5 Sept 2022

Keywords

  • Forecasting; exchange rates; Bayesian vector autoregression; uncovered interest rate; sticky price

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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