Tuesday, June 28, 2011

Puzzles in international economics

If you are looking to revolutionize economics, there was a time when the gold standard seem to be a prediction model for exchange rate predictions. In 1983, Meese and Rogoff argued that all the models we had could not outperform a random walk model(basically using the exchange rate in the previous period and a random shock). From what I heard, there are discussions on whether the problem has been solved, but I don't know about that so that'll be for a later post.

However, if you were afraid of a puzzle drought, no worries. You can also try to predict commodity prices. From a recent New York Fed discussion:
[H]ave economists and analysts made any progress in their ability to predict movements in commodity prices? In this post, we find there is no easy answer. (...) [T]he results warn against interpreting current forecasts of commodity prices upswings as reliable and dependable signals of future inflationary pressure.(...)No easy generalization or pattern emerges, and the results look almost random. In fact, we are unable to generate forecasts that are, on average, more accurate and robust than those based on autoregressive or random walk specifications.

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