Exchange Rates and Fundamentals: Evidence from Long-Horizon Regression Tests

This article considers the long-run relationship between nominal exchange rates and fundamentals from a different perspective. We apply a long-horizon regression approach proposed by Fisher and Seater (1993) and find evidence supporting the explanatory power of exchange rate models. In particular, the Taylor-rule model outperforms other conventional models. We then use the inverse power function (IPF) proposed by Andrews (1989) to investigate the power of the Fisher-Seater test. The IPF analysis provides additional evidence supporting exchange rate models. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2009.