JOURNAL PUBLICATIONS

• “Taylor Rules and the Euro ", with Alex Nikolsko-Rzhevskyy and David Papell, Journal of Money, Credit, and Banking, 2011, 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 Economics, 77, 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

• “Phoenix Taylor Rule Exchange Rate Forecasting during the Financial Crisis", with David Papell, 2011

Abstract: This paper evaluates out-of-sample exchange rate forecasting of Taylor rule models for the euro/dollar exchange rate with real-time data during the financial crisis of 2008-2009. The Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, but the evidence weakens in 2008:Q3 and falls precipitously at the peak of the crisis in 2008:Q4. Taylor rule forecasting, however, rises from the dead in 2009 and 2010. We also compare the out-of-sample performance of the Taylor rule specifications with conventional models. The model with interest rate differentials can only outperform the random walk before the crisis, and the monetary and purchasing power parity models cannot outperform the random walk for any forecast interval.

• “Real-Time Exchange Rate Predictability with Taylor Rule Fundamentals", 2011

Abstract: This paper revisits the long-standing Meese and Rogoff puzzle by examining exchange rate predictability with Taylor rule fundamentals and real-time data. Most of the existent literature on exchange rate predictability uses historical data which, because it was not available to the public at the time the forecasts were made, cannot be used to evaluate out-of-sample predictability. Furthermore, most studies of out-of-sample exchange rate forecasting still use 1970’s vintage monetary models. In this paper, I evaluate short-horizon exchange rate predictability using real-time data and Taylor rule fundamentals for 9 OECD currencies, plus the Euro, vis-à-vis the U.S. dollar during the last decade and find strong evidence of exchange rate predictability at the 1-month horizon for 8 out of 10 exchange rates and weak evidence of predictability for the remaining 2 exchange rates. In order to understand how market participants form their exchange rate forecasts, I examine the implications of using different types of real-time data. The evidence of exchange rate predictability is stronger with current-vintage real-time data, which consist of all information available at any given month, than with first-release real-time data, which contain only new information about macroeconomic fundamentals. It is stronger with symmetric Taylor rule models, where the real exchange rate does not appear in the foreign country’s Taylor rule, than with asymmetric models that contain an element of real exchange rate targeting.

WORK IN PROGRESS

“Exchange Rates and Survey Expectations”, with Onur Ince, 2011

“Stock Return Predictability and the Taylor Rule”, with Lei Jiang, 2011

“Macroeconomic Prospects of China’s Outward Foreign Direct Investments”, with Ilan Alon and Jian Zhang, 2011

“Can Professional Exchange Rate Forecasters Forecast Exchange Rates?”, 2011

“Testing Uncovered Interest Rate Parity Using Survey-Based Expectations”, with Levent Bulut, 2010

“Real-Time Energy Substitution in the U.S.”, with Henry Thompson, 2010