tailieunhanh - The importance of interest rates for forecasting the exchange rate

Our results suggest that stronger competition implies significantly lower interest rate spreads for most loan market products, as we expected. This result implies that bank interest rates are lower and that the pass-through of market rates is stronger, the heavier competition is. We find evidence of the latter in our error correction model of bank interest rates. Furthermore, when loan market competition is stronger, we observe larger bank spreads (that is, lower bank interest rates) on current account and time deposits. Lower time deposits rates are confirmed by the estimates of the ECM. Apparently, the competitive pressure in. | Discussion Papers No. 340 February 2003 Statistics Norway Research Department Hilde C. Bj0rnland and Havard Hungnes The importance of interest rates for forecasting the exchange rate Abstract This study compares the forecasting performance of a structural exchange rate model that combines the purchasing power parity condition with the interest rate differential in the long run with some alternative models. The analysis is applied to the Norwegian exchange rate. The long run equilibrium relationship is embedded in a parsimonious representation for the exchange rate. The structural exchange rate representation is stable over the sample and outperforms a random walk in an out-ofsample forecasting exercise at one to four horizons. Ignoring the interest rate differential in the long run however the structural model no longer outperforms a random walk. Keywords Equilibrium real exchange rate cointegration VAR out-of-sample forecasting JEL classification C22 C32 C53 F31 Acknowledgement The authors wish to thank Â. Cappelen P. R. Johansen and T. Skjerpen for very useful comments and discussions. The usual disclaimers apply. Address Hilde C. Bjornland University of Oslo and Statistics Norway. E-mail . Havard Hungnes Statistics Norway Research Department. E-mail Discussion Papers comprise research papers intended for international journals or books. As a preprint a Discussion Paper can be longer and more elaborate than a standard journal article by including intermediate calculation and background material etc. Abstracts with downloadable PDF files of Discussion Papers are available on the Internet http For printed Discussion Papers contact Statistics Norway Sales- and subscription service N-2225 Kongsvinger Telephone 47 62 88 55 00 Telefax 47 62 88 55 95 E-mail Salg-abonnement@ 1. Introduction The well cited finding by Meese and Rogoff 1983 that a comprehensive range of exchange rate models were unable to .