fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

the real exchange rate conundrum the case of central america abstract this paper evaluates alternative measures of the real exchange rate for mexico and central american countries bilateral and multilateral real exchange rates using the consumer price index wholesale price index and gross domestic product deflator are calculated there are often significant differences between the bilateral and multilateral measures of the real exchange rate real exchange rates based on consumer price indexes and gross domestic product deflators were found to be more closely related to each other than either one was to the wholesale price index

market contagion evidence from the panics of 1854 and 1857 to test a model of contagion where individuals hear some bad news and communicate it to their acquaintances who then pass it on leading to a market panic requires a knowledge of the information networks of participants something hitherto unavailable for two panics in the 1850s this paper examines the behavior of irish depositors in a new york bank as recent immigrants their social network was determined largely by their place of origin in ireland and where they lived in new york during both panics this social network turns out to be the prime determinant of behavior

bayesian analysis of the output gap our objective is to build output gap estimates that benefit from information provided by phillips curve theory and business cycle studies for this we develop a bayesian analysis of the bivariate phillips curve model proposed by kuttner for estimating potential output given our priors we obtain samples from parameters and state variables joint posterior distribution following a gibbs sampling strategy we sample the state variables given parameters using the carter kohn procedure and we exploit a likelihood factorization to draw parameters given the state a metropolis hastings step is used to remove the conditioning on starting values to accommodate the variance moderation that has been observed on u s gross domestic product kuttner s model is extended for a change in variance parameters we apply this methodology to the analysis of the output gap in the united states and in the european monetary union finally some important extensions to the original kuttner model are discussed

estimating the open market desk s daily reaction function this paper presents the results of an empirical investigation into the proximate determinants of the federal reserve s daily open market operations using information available each morning at the fed conference call the author models the open market desk s choice of both the quantity and the type of operation using a friction model for the former and a multinomial logit framework for the latter different types of operations are shown to send different signals to the market about the underlying thrust of fed policy and open market operations in recent years are shown to have become increasingly keyed to the federal funds rate copyright 1993 by ohio state university press

the development of agricultural policies in central and eastern europe abstract agricultural and food subsidies and fixed prices imposed by the old central command system have been abolished recently throughout central and eastern europe cee however protectionist government regulations have been reintroduced this viewpoint argues that these policy changes are consistent with the results from the literature on new political economy or endogenous policy theory moreover as privatization of farms continues and the non agricultural sectors of the economy start growing this theory predicts that protectionist policies will increase in the agricultural sector in central and eastern europe in addition agricultural protectionism in western countries stimulates the increase in cee agricultural protectionism

welfare impacts of import controls on botswana s horticulture botswana has for the past two decades used import controls permits to regulate horticultural imports and thereby promote economic diversification through import substitution this article estimates import demand equations to capture the impact of import controls on horticultural imports oranges potatoes and onions into botswana using data for 1974 to 2001 parameter estimates are used to compute nominal protection rates nprs and welfare effects model generated nprs are estimated at 191 75 and 109 for oranges potatoes and onions respectively imports of oranges potatoes and onions declined by 32 29 and 35 respectively due to the implementation of import controls over time consumer losses and quota rents rose while producer gains declined net social losses also increased implying that import controls became increasingly burdensome it is argued that import controls have not been very effective in promoting import substitution the study is important for the trade liberalization debate in the southern african customs union sacu and within the southern african development community sadc where import permits and other nontariff barriers are pervasive have proliferated and are a major hindrance to intraregional trade

regime changes in international real interest rates are they a monetary phenomenon in this paper we use the bai and perron 1998 2001 2003 methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries we find extensive evidence of structural breaks in the mean real interest rate for all 13 countries in an attempt to explain the breaks in international real interest rates we also test for multiple structural breaks in the mean inflation rate for the 13 countries once again we find extensive evidence of structural breaks in the mean inflation rate for all of the countries interestingly the breaks in inflation rates and real interest rates often coincide with increases decreases in the mean inflation rate as we move from one regime to the next typically associated with decreases increases in the mean real interest rate

measuring the business cycle effects of permanent and transitory shocks in cointegrated time series abstract this paper proposes a statistical framework to evaluate the contribution of permanent and transitory shocks to the cyclical fluctuations of cointegrated variables an empirical application with us macroeconomic data reveals that transitory shocks are responsible for most of the variability at the business cycle frequencies

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

technology shocks structural breaks and the effects on the business cycle abstract it is shown that time series of us productivity and hours are apparently affected by a structural break in the late 60s moreover the importance of technology shocks over the business cycle has sharply decreased after the break

new measures of the output gap based on the forward looking new keynesian phillips curve abstract forward looking versions of the new keynesian phillips curve imply that the output gap the deviation of the actual output from its natural level due to nominal rigidities drives the dynamics of inflation relative to expected inflation we exploit this to set up a bivariate unobserved component model for extracting new estimates of the output gap in the us the gap estimates are large and persistent even after allowing for correlated trend and cycle shock we then augment our model to use the information in the unemployment rate the estimates confirm the presence of a large and persistent cyclical component

permanent and transitory policy shocks in an empirical macro model with asymmetric information abstract an empirical model that allows for shifts in the inflation target and imperfect policy credibility is estimated imperfect credibility defined by differences between the perceived and actual inflation target obtains because private agents cannot correctly distinguish between permanent target shocks and transitory funds rate shocks learning affects responses to structural shocks important features include the absence of a price puzzle permanent nominal effects of aggregate supply shocks due to partial policy accommodation and the ability to examine responses to a permanent target change and expectations shocks perceptions of permanent target shocks explain sizable movements in bond yields and inflation

price and income elasticities of disaggregated import demand results from uecms and an application this paper presents an empirical analysis of the demand for maize milk powder butter and rice imports in cyprus using annual time series data covering the period 1975 1994 none of these products is produced in cyprus and all the necessary quantities are imported to meet domestic demand the primary objective of the paper is to derive long run price and income elasticities of import demand that can be used to analyse the impact of various policies such as the adoption of the common agricultural policy cap when and if the republic of cyprus joins the european union eu in so doing the paper takes on board some recent developments in time series econometrics the cointegration test used the bounds test is a recent test and is based on the estimation of an unrestricted error correction model uecm parsimonious models were derived using hendry s general to specific approach the estimated elasticities were subsequently used to quantify some of the implications for cyprus had the cap been ope

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

the european union enlargement the case of agriculture in slovenia abstract the costs and benefits of eu accession for slovenian agriculture were estimated and discussed by use of comparative and empirical analyses the structural and natural conditions of slovenian agricultural production and policies differ a lot from the european ones the production is small in scale the support is based on price subsidies producer prices are almost at the level of the european prices and hence they are significantly higher than on the world market the pse computed shows that slovenian agricultural support is at the average level of the oecd member states which directly implies the highest agrarian protection level amongst all ceec candidates by using the static deterministic income model for slovenian agriculture the consequences of various scenarios of accession to the common agricultural policy cap have been estimated also indicating the potential policy changes running the present cap the net income in agriculture would increase further changes of cap and restrictive policy towards new member countries would abate the attractiveness of eu for the slovenian agricultural producers the budget benefits of the eu accession could be described as slightly positive their volume depends on negotiations results as well as on the preparation of domestic policy the eu accession and trade liberalisation process by slovenia calls for a reform of domestic agricultural policy

import dependency and structural adjustment in sub saharan africa one of the effects of structural adjustment programs in sub saharan africa has been the reduction of imports in the face of scarce foreign exchange this article takes the analysis of import demand beyond the traditional income and price determinants to account for factors likely to be important to sub saharan african countries in the 1990s first the effect of demand on imports is reflected by the level of absorption rather than the less direct income variable second because adjustment programs may cut government consumption and through increases in interest rates reduce investment these components of absorption are also considered independently to assess their differential effect on imports third import barriers are often set in dollar terms to limit the use of foreign exchange because reliable and complete data for import restrictions are not available the ratio of exports to debt is included as an indicator of foreign exchange availability to reflect its effect on trade barriers and thus imports the findings suggest that this more comprehensive assessment of import demand will be needed if the size and even direction of changes in import demand in response to policy reform is to be understood and anticipated

high and volatile real interest rates where does the fed fit in the federal reserve s new procedures for the conduct of monetary policy introduced on october 6 1979 have been the subject not only of considerable academic and political interest but also of intense debate b friedman 1982 roley 1982 walsh 1982 1984 mascaro and meltzer 1983 among others the fed s new operating procedures generally are perceived to have resulted in abnormally high and volatile real interest rates and thus to have contributed to if not been totally responsible for the deepest recession in postwar history in this paper we address the following question was the advent of the increased volatility and level of the real rate of interest concurrent with the fed s october 1979 change in operating procedures that is was the real rate of interest high and more volatile immediately after the october 1979 change in policy procedures in which case we might infer a connection between the fed s change in policy procedures and the increased volatility and level of the real rate or did the real rate become high and more volatile some time following the policy change which might lead us to conclude that the increased volatility and the increased level of the real rate was connected to some other event s occurring after the october 1979 policy change

the new econometrics of structural change dating breaks in u s labor productivity we have seen the emergence of three major innovations in the econometrics of structural change in the past fifteen years 1 tests for a structural break of unknown timing 2 estimation of the timing of a structural break and 3 tests to distinguish unit roots from broken time trends these three innovations have dramatically altered the face of applied time series econometrics in this paper we review these three innovations and illustrate their application through an empirical assessment of u s labor productivity in the manufacturing durables sector

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

technology shocks and monetary policy assessing the fed s performance abstract the purpose of the present paper is twofold first we characterize the fed s systematic response to technology shocks and its implications for u s output hours and inflation second we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule including the optimal one in the context of a standard business cycle model with sticky prices our main results can be described as follows first we detect significant differences across periods in the response of the economy as well as the fed s to a technology shock second the fed s response to a technology shock in the volcker greenspan period is consistent with an optimal monetary policy rule third in the pre volcker period the fed s policy tended to overstabilize output at the cost of generating excessive inflation volatility our evidence reinforces recent results in the literature suggesting an improvement in the fed s performance

the pattern of agricultural price distortions in central and eastern europe abstract nominal and adjusted protection rates for nine agricultural commodities in seven central european and three baltic states are estimated for the transition period 1990 1995 our estimates indicate that agricultural and food price distortions differ strongly between central and east european countries between commodities and varied over time the average level of price distortions decreased in 1991 and 1992 after price and trade liberalization but increased again in 1993 as many of these countries reintroduced protectionist price and trade policy measures since 1994 the average level of price distortions has declined again accounting for exchange rate policy effects further reduces estimates of protection of agricultural producers

changing monetary policy rules learning and real exchange rate dynamics when the exchange rate is priced by uncovered interest parity and central banks set nominal interest rates according to a reaction function such as the taylor rule the real exchange rate will be determined by expected inflation and the output gap or the unemployment gap of the home and foreign countries this paper examines the implications of these taylor rule fundamentals for real exchange rate determination because the true parameters in central bank policy rules are unknown to the public and change over time the model is presented in the context of a least squares learning environment this simple learning model captures the volatility and the major swings in the real deutschemark euro dollar exchange rate from 1976 to 2007

monetary policy rules for an open economy the most popular simple rule for the interest rate due to taylor 1993a is meant to inform monetary policy in economies that are closed on the other hand its main open economy alternative i e ball s 1999 rule based on a monetary conditions index mci may perform poorly in the face of specific types of exchange rate shocks and thus cannot offer guidance for the day to day conduct of monetary policy in this paper we specify and evaluate a comprehensive set of simple monetary policy rules that are suitable for small open economies in general and for the united kingdom in particular we do so by examining the performance of a battery of simple rules including the familiar taylor rule and mci based rules a la ball this entails comparing the asymptotic properties of a two sector open economy dynamic stochastic general equilibrium model calibrated on united kingdom data under different rules we find that an inflation forecast based rule ifb i e a rule that reacts to deviations of expected inflation from target is a good simple rule in this respect when the horizon is adequately chosen adding a separate response to the level of the real exchange rate contemporaneous and lagged appears to reduce the difference in adjustment between output gaps in the two sectors of the economy but the improvement is only marginal importantly an ifb rule with or without exchange rate adjustment appears robust to different shocks in contrast to naive or ball s mci based rules

accounting for exchange rate variability in present value models when the discount factor is near 1 a well known stylized fact about nominal exchange rates among low inflation advanced countries particularly u s exchange rates is that their logs are approximately random walks michael i mussa 1979 is most frequently cited for observing this regularity in a famous pair of papers richard a meese and kenneth rogoff 1983a b found that the structural models of the 1970 s could not beat a random walk in explaining exchange rate movements recently some authors menzie chinn and meese 1995 nelson mark 1995 mark and donggyu sul 2001 have argued that the models can outforecast the random walk at long horizons but a comprehensive recent study by yin wong cheung et al 2003 documents that no model consistently outperforms a random walk why one obvious explanation is that the macroeconomic variables that determine the exchange rate themselves follow random walks if the log of the nominal exchange rate is a linear function of forcing variables that are random walks then it will inherit the random walk property the problem with this explanation is that the economic fundamentals proposed in the most popular models of exchange rates do not in fact follow simple random walks one resolution to this problem is that there may be some other fundamentals ones that have been proposed in some models but are not easily measurable or ones that have not yet been proposed at all that are important in determining exchange rates if these unobserved fundamentals follow random walks and dominate the variation in exchange rate changes then exchange rates will nearly be random walks even if the standard observed fundamentals are not in engel and west 2003a hereinafter ew we propose an alternative explanation we consider linear models of the exchange rate that are in the asset market approach to exchange rates these models emphasize the role of expectations of future economic fundamentals in determining the current exchange rate the exchange rate expressed as the home currency price of foreign currency in this paper can be written as a discounted sum of the current and expected future fundamentals

mcis and monetary policy abstract several central banks have recently adopted a monetary conditions index mci to guide monetary policy under floating exchange rates this paper discusses some analytical and practical questions raised by mcis furthermore using data for australia canada and new zealand which all operate monetary policy under floating rates and with an inflation target it estimates the responses of the central banks to exchange rate changes the results reveal clear differences between central banks while the reserve bank of australia does not appear to respond the bank of canada and the reserve bank of new zealand who use the mci as an operating target do respond quite strongly to movements in the exchange rate

taylor rules and the deutschmark dollar real exchange rate we explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate the interest rate rule in conjunction with some standard assumptions implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials the weights are functions of the parameters of the interest rate rule an initial look at german data yields some support for the model

measuring the degree of exchange market intervention in a small open economy abstract in this article i introduce an index of intervention activity which can be calculated on the basis of observed data this intervention index measures intervention activity as the proportion of exchange market pressure relieved by exchange market intervention the properties of the intervention index are established analytically using a model of a small open economy with rational expectations the index is used to calculate measures of bilateral and multilateral intervention for canada over the period 1975 1990

real exchange rate behavior and economic performance in ldcs in recent years policy discussions have included increasing references to real exchange rate rer stability and correct exchange rate alignment as crucial conditions to improve economic performance in less developed countries ldcs 1 evidence from latin american asian and african countries is often quoted to support the view that the link between rer behavior and economic performance is strong it is argued that while unstable rers inhibited export growth in some of latin america their stability was fundamental in promoting east asian expansion in many african countries on the other hand persistently misaligned local currencies harmed the development of agriculture reducing domestic food supply 2 but in spite of its importance no empirical work has been attempted either to test the relationship between rer behavior and performance indicators at a broad multicountry level or to investigate the sources of rer variability and misalignment in ldcs the theoretical literature on rer determinants has been recently surveyed by sebastian edwards 3 he distinguishes between equilibrium and disequilibrium rers and between external and domestic rer determinants although domestic policies are often said to account for significant rer variations empirical work has only concentrated on the effect of nominal devaluations4 or speculative crises arising from expansionary monetary policies in a system of fixed ex

multiple regimes in u s monetary policy a nonparametric approach we use two different nonparametric methods to determine whether there were multiple regimes in u s monetary policy over the period 1955 2003 we model monetary policy using two different versions of taylor s rule for the nominal interest rate target by contrast with parametric tests for regime changes the nonparametric methods we use allow the data to determine the dimensions on which to split the sample for purposes of estimating the coefficients of the taylor rule we find evidence for a few structural breaks and consistent agreement between our two nonparametric methods on the dating of those breaks

imports under a foreign exchange constraint the traditional model of import behavior which looks only at the gross domestic product gdp and real import prices as explanatory variables failed to predict or explain the developing countries import slumps in the early 1980 s this paper expands on a more useful model the hemphill which incorporates the traditional variables relative prices and domestic income with the variables introduced by hemphill foreign exchange receipts and international reserves section 2 of this paper discusses the theoretical models in the present study the traditional model used here as a benchmark is presented first and is later extended to include foreign exchange constraints section 3 presents the empirical estimates of the general import models that include foreign constraints and two special cases the hemphill and benchmark models using pooled cross section time series section 4 concludes that policy makers must look at the policies that affect gdp and prices and the availability of foreign exchange when trying to estimate import behavior in developing countries

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

agricultural incentives in developing countries measuring the effect of sectoral and economywide policies the impact of sector specific direct and economywide indirect policies on agricultural incentives for 18 developing countries for the period 1975 84 are estimated the direct effect is measured by the proportional difference between the producer price and the border price adjusting for distribution storage transport and other marketing costs the indirect effect has two components 1 the impact of the unsustainable portion of the current account deficit and of industrial protection policies on the real exchange rate and thus on the price of agricultural commodities relative to nonagricultural nontradables and 2 the impact of industrial protection policies on the relative price of agricultural commodities to that of nonagricultural tradable goods the authors found that a in almost all cases the direct effect is equivalent to a tax on exportable goods and to a subsidy for importables b the indirect effect also taxes agriculture and dominates the direct effect and c the direct policies for both importables and exportables stabilize domestic producer prices

taylor rules and the canadian us equilibrium exchange rate abstract this paper identifies the canadian us equilibrium exchange rate based on a simple structural model of the real exchange rate in which monetary policy follows a taylor rule interest rate reaction function the exchange rate is explained by relative output and inflation as observable variables and by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate using canadian data over 1974 2009 we jointly estimate the unobserved components and the structural parameters using the kalman filter and bayesian technique we find that canada s equilibrium exchange rate evolves smoothly and follows a trend depreciation the transitory component is found to be very persistent but much more volatile than the equilibrium rate resulting in few but prolonged periods of currency misalignments

trend cycle correlation drift break and the estimation of trend and cycle in canadian gdp abstract univariate correlated trend cycle models are highly sensitive to the specifications of breaks in the data this paper argues using monte carlo experiments that a bivariate correlated unobserved components uc framework with breaks delivers substantially more accurate results for the trend cycle parameters than the corresponding univariate frameworks in a finite sample size the paper estimates stochastic trend and cyclical fluctuations in canada from a bivariate uc model results show a fairly volatile stochastic trend after the drift break and the negative trend cycle shock correlation are accounted for the estimated cyclical component is large persistent and consistent with ecri denoted canadian recessions

an econometric analysis of u s vital wheat gluten imports abstract in light of the wheat wet milling industry s development in the e c and of the prominent role u s imports play in the international market for wheat gluten this paper discusses the international market for wheat gluten an important component of processed grain products an econometric analysis of the u s import demand for wheat gluten is undertaken the price of flour income and the u s value of wheat protein are found to be important determinants of wheat gluten imports

meat imports in sierra leone analysis constraints and policy implications abstract this article examines the factors contributing to the shortages of meat and other livestock products in sierra leone and analyses the import market for meat in sierra leone a two stage least squares procedure is used to determine the import demand responses for meat in sierra leone the empirical estimates suggest that real exchange rates income trade restrictions domestic production and prices of meat and competing products are the key determinants of import demand responses for meat in sierra leone the relative sizes of the estimates reveal that policies targeted at domestic meat production income trade and real exchange rate adjustments have more significant effects than pricing policies

on the role of technology shocks as a source of business cycles some new evidence i provide some new evidence that reinforces the conclusion in gal o 1999 that exogenous variations in technology play a very limited role if any as sources of the business cycle first i provide evidence that supports the identie cation of technology shocks proposed in that paper second i show that similar e ndings obtain when the same approach is implemented for the euro area using a newly available data set jel e32 e24

equilibrium exchange rates in transition economies taking stock of the issues in this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc in particular we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual balassa samuelson effect such as the behaviour of the real exchange rate of the open sector and regulated prices we then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model namely differences in the theoretical underpinnings differences in the econometric estimation techniques and differences relating to the time series and cross sectional dimensions of the data the ensuing three dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size copyright blackwell publishers ltd 2006

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

out of sample exchange rate predictability with taylor rule fundamentals abstract an extensive literature that studied the performance of empirical exchange rate models following meese and rogoff s meese r a rogoff k 1983a empirical exchange rate models of the seventies do they fit out of sample journal of international economics 14 3 24 seminal paper has not convincingly found evidence of out of sample exchange rate predictability this paper extends the conventional set of models of exchange rate determination by investigating predictability of models that incorporate taylor rule fundamentals 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 with the strongest evidence coming from specifications that incorporate heterogeneous coefficients and interest rate smoothing the evidence of predictability is much stronger with taylor rule models than with conventional interest rate purchasing power parity or monetary models