Exchange rates and individual good's price misalignment: Some preliminary evidence of long-horizon predictability

Arbeitspapier

When prices are sticky, movements in the nominal exchange rate have a direct impact on international relative prices. A relative price misalignment would trigger an adjustment in consumption and employment, and may help to predict future movements in the exchange rate. Although purchasing-power-parity fundamentals, in general, have only weak predictability, currency misalignment may be indicated by price differentials for some goods, which could then have predictive power for subsequent re-evaluation of the nominal exchange rate. The authors collect good-level price data to construct deviations from the law of one price and examine the resulting price-misalignment model's predictive power for the nominal exchange rates between the U.S. dollar and two other currencies: the Japanese yen and the U.K. pound. To account for small-sample bias and data-mining issues, inference is drawn from bootstrap distributions and tests of superior predictive ability (SPA) are performed. The slope coefficients and R-squares increase with the forecast horizon for the bilateral exchange rates between the U.S. dollar and the Japanese yen and the U.S. dollar and the U.K. pound. The out-of-sample SPA tests suggest that the authors' price-misalignment model outperforms random walks either with or without drift for the U.S. dollar vis-à-vis the Japanese yen at the 5 per cent level of significance over long horizons.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Bank of Canada Discussion Paper ; No. 2011-8

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Foreign Exchange ; Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation: Models and Applications
• Thema: Exchange rates ; International topics ; Preisrigidität ; Wechselkurs ; Internationaler Preiszusammenhang ; Kaufkraftparität ; USA ; Japan ; Großbritannien

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Dong, Wei ; Nam, Deokwoo
• Ereignis: Veröffentlichung
• (wer): Bank of Canada
• (wo): Ottawa
• (wann): 2011

Weitere Informationen

• DOI: doi:10.34989/sdp-2011-8
• Handle: http://hdl.handle.net/10419/66962
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ