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Do Divisia monetary aggregates help forecast exchange rates in a negative interest rate environment?
Binner, Jane M. Tong, Meng Molinas, Luis A.
Binner, Jane M.
Tong, Meng
Molinas, Luis A.
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2022-10-12
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Abstract
This paper contributes to the literature as the first work of its kind to examine the role and importance of Divisia monetary aggregates and concomitant User Cost Price indices as superior monetary policy forecasting tools in a negative interest rate environment. We compare the performance of Divisia monetary aggregates with traditional simple-sum aggregates in several theoretical models and in a Bayesian VAR to forecast the exchange rates between the euro, the dollar and yuan at various horizons using quarterly data. We evaluate their performance against that of a random walk using two criteria: Root Mean Square Error ratios and the Clark-West statistic. We find that, under a free-floating exchange regime, superior Divisia monetary aggregates outperform their simple sum counterparts and the benchmark random walk in a negative interest rate environment, consistently.
Citation
Binner, J. M., Tong, M., & Molinas, L. A. (2022). Do Divisia monetary aggregates help forecast exchange rates in a negative interest rate environment? European Journal of Finance, 29(7), 780-799. https://doi.org/10.1080/1351847X.2022.2124120
Publisher
Taylor & Francis
Journal
Euopean Journal of Finance
Research Unit
DOI
10.1080/1351847X.2022.2124120
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PubMed Central ID
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Article
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Description
This is an Accepted Manuscript of an article published by Taylor & Francis in European Journal of Finance on 12/10/2022, available online: https://doi.org/10.1080/1351847X.2022.2124120
Series/Report no.
ISSN
1351-847X
EISSN
1466-4364