 |
Politics and Exchange Rate ForecastsS. Brock Blomberg |
(Abstract for 1996 paper available below. Full Research Working Papers can be ordered at no charge.)ABSTRACT Standard exchange rate models perform poorly in out-of-sample forecasting when compared to the random walk model. We posit part of the poor performance of these models may be due to omission of political factors. We test this hypothesis by including political variables that capture party-specific, election-specific and candidate-specific characteristics. Surprisingly, we find our political model outperforms the random walk in out-of-sample forecasting at one to twelve month horizons for the pound/dollar, mark/dollar, pound/mark and the trade-weighted dollar, mark, and pound exchange rates. JEL Classification System: F31, G12, H8. Keywords: Political Economy, Exchange Rates, Asset Prices. S. Brock Blomberg is a professor of economics at Wellesley College. Gregory D. Hess is currently teaching at the University of Cambridge and is an assistant professor of economics at the University of Kansas. Part of this paper was written while Blomberg was an economist at the Federal Reserve Bank of New York and Hess was a visiting scholar at the Reserve Bank of Kansas City. The authors would like to thank Catherine Bonser-Neal, Todd Clark, Joseph Joyce, Andrew Rose, and two anonymous referees for helpful comments. The views expressed by the authors do not necessarily reflect the views of the Federal Reserve Bank of Kansas City, the Federal Reserve Bank of New York, or the Federal Reserve System. Blomberg e-mail: sblomberg@wellesley.edu. Hess e-mail: Greg.Hess@econ.cam.ac.uk.Back to top RWP home |