JOURNAL PUBLICATIONS

• “Rationality and Forecasting Accuracy of Exchange Rate Expectations: Evidence from Survey-Based Forecasts", with Onur Ince, forthcoming, Journal of International Financial Markets, Institutions, and Money, 2016 Full Text

Abstract: We examine rationality, forecasting accuracy, and economic value of the survey-based exchange rate forecasts for 10 developed and 23 developing countries at the 3-, 12-, and 24-month horizons. Using the data from two surveys for the period from 2004 to 2012, we find strong evidence that the forecasts for developing countries are biased at all forecast horizons. For developed countries, forecasts are strongly biased at the 3-month horizon, the bias decreases at the 12-month horizon, and increases again at the 24-month horizon. Based on the magnitude of the forecast errors and the direction of change, long-term forecasts are more accurate than short-term forecasts. Economic evaluation of the forecasts indicates that the forecasters are successful at generating positive economic profits, and economic gains of the forecasts for developed countries improve with the forecast horizon.

• “Taylor Rule Deviations and Out-of-Sample Exchange Rate Predictability", with Onur Ince and David Papell, forthcoming, Journal of International Money and Finance, 2016 Full Text

Abstract: The Taylor rule has become the dominant model for academic evaluation of out-of-sample exchange rate predictability. Two versions of the Taylor rule model are the Taylor rule fundamentals model, where the variables that enter the Taylor rule are used to forecast exchange rate changes, and the Taylor rule differentials model, where a Taylor rule with postulated coefficients is used in the forecasting regression. We use data from 1973 to 2014 to evaluate short-run out-of-sample predictability for eight exchange rates vis-à-vis the U.S. dollar, and find strong evidence in favor of the Taylor rule fundamentals model alternative against the random walk null. The evidence of predictability is weaker with the Taylor rule differentials model, and still weaker with the traditional interest rate differential, purchasing power parity, and monetary models. The evidence of predictability for the fundamentals model is not related to deviations from the original Taylor rule for the U.S., but is related to deviations from a modified Taylor rule for the U.S. with a higher coefficient on the output gap. The evidence of predictability is also unrelated to deviations from Taylor rules for the foreign countries and adherence to the Taylor principle for the U.S.

• "Taylor Rule Exchange Rate Forecasting during the Financial Crisis", with David Papell, NBER Working Paper #18330, NBER International Seminar on Macroeconomics 2012, Volume 9, The University of Chicago Press, Francesco Giavazzi and Kenneth D. West, eds., 2013, Full Text

Abstract: This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.

• “Macroeconomic Prospects of China’s Outward FDI”, with Ilan Alon and Jian Zhang, Transnational Corporations Review 4(2), June 2012, pp. 16-40, Full-Text

Abstract: We present evidence from panel data on overseas foreign direct investment (OFDI) by Chinese firms in 103 countries during 2003-2007. The data suggest that Chinese imports, unlike Chinese exports, stimulate investment in the country of origin. This article supports the theory that Chinese investment abroad is horizontal and designed to serve the Chinese local market (import platform investment). Estimates suggest that a 1% change in imports from China will lead to a 0.15% change in Chinese OFDI. We also find that an appreciation of the Chinese exchange rate will have a strong influence on firm entry decisions.  

• “Taylor Rules and the Euro ", with Alex Nikolsko-Rzhevskyy and David Papell, Journal of Money, Credit, and Banking 43 (2-3), 2011, pp. 535-552, Full-text

Abstract: This paper uses real-time data to show that the variables which normally enter central banks’ Taylor rules for interest-rate-setting, can provide evidence of out-of-sample predictability for the U.S. Dollar/Euro exchange rate from the inception of the Euro in 1999 to 2007. The strongest evidence is found for specifications that constrain the coefficients on inflation and real economic activity to be the same for the U.S. and the Euro Area, do not incorporate interest rate smoothing, and do not include the real exchange rate in the forecasting regression. The evidence of predictability is found with both one-quarter-ahead and longer horizon forecasts.

• “Out-of-Sample Exchange Rate Predictability with Taylor Rule Fundamentals”, with David Papell, Journal of International Economics77, 2009, pp.167-180, Full-text, Data, and Data Appendix

Abstract: An extensive literature that studied the performance of empirical exchange rate models following Meese and Rogoff’s (1983a) seminal paper has not yet convincingly overturned their result of no out-of-sample predictability of exchange rates. This paper extends the conventional set of models of exchange rate determination by investigating predictability of models that incorporate Taylor rule fundamentals. Using Clark and West’s (2006) recently developed inference procedure for testing the equal predictability of two nested models, we find evidence of short-term predictability for 11 out of 12 currencies vis-a-vis the U.S. dollar over the post-Bretton Woods float. The evidence is much stronger with Taylor rule models than with conventional interest rate, purchasing power parity, or monetary models.

• “Taylor Rules with Real-Time Data: A Tale of Two Countries and One Exchange Rate", with Alex Nikolsko-Rzhevskyy and David Papell, Journal of Monetary Economics 55, 2008, pp. S63-S79 Full-text

Abstract: Using real-time data that reflects information available to monetary authorities at the time they are formulating policy, we find that estimated Taylor rules based on revised and real-time data differ more for Germany than for the U.S., Taylor rules using real-time data suggest differences between U.S. and German monetary policies, and Taylor rules for the U.S. using inflation forecasts are nearly identical to those using lagged inflation rates. Evidence of out-of-sample predictability for the dollar/mark nominal exchange rate with forecasts based on Taylor rule fundamentals is only found with real-time data and does not increase if inflation forecasts are used.

WORKING PAPERS

• “Out-of-Sample Exchange Rate Predictability with Real-Time Data", with Onur Ince, Under Review, 2016 Full Text

Abstract: This paper evaluates short-run out-of-sample exchange rate predictability with real-time data for 15 OECD countries from 1973 to 2013. We consider the Taylor rule fundamentals model, where the variables that enter the Taylor rule are used to forecast exchange rate changes, and the Taylor rule differentials model, where a Taylor rule with postulated coefficients is used in the forecasting regression. We find evidence of predictability with the Taylor rule fundamentals model for 9 out of 15 countries. The Taylor rule differentials model performs worse, and the evidence of predictability is the weakest with the conventional monetary and PPP models.

• “Stock Return Predictability and Taylor Rules", with Onur Ince and Lei Jiang, 2016, Under Review, Full Text

Abstract: This paper evaluates stock return predictability with inflation and output gap, the variables that typically enter the Federal Reserve Bank’s interest rate setting rule. We introduce Taylor rule fundamentals into the Fed model that relates stock returns to earnings and long-term yields. Using real-time data from 1970 to 2008, we find evidence that the Fed model with Taylor rule fundamentals performs better in-sample and out-of-sample than the constant return and original Fed models. We evaluate economic significance of the stock return models and find that the models with Taylor rule fundamentals consistently produce higher utility gains than the benchmark models.

• "Testing Uncovered Interest Rate Parity Using Survey-Based Expectations", with Onur Ince and Levent Bulut, 2016

Abstract: This paper tests the uncovered interest rate parity (UIRP) using survey-based exchange rate expectations for 8 advanced countries plus the Euro Area and 16 developing countries over the period from January, 1990 to December, 2012. The use of survey forecasts of exchange rates allows us to investigate the role of rational expectations and the existence of risk premia in evaluating the UIRP. At the 3-month forecast horizon, the evidence of UIRP is strongly rejected for all 25 currencies in our sample. As the forecast horizon expands, there is more evidence in favor of UIRP. This finding is confirmed in panel setting.