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Taylor Rules and the Euro
Author(s) -
MOLODTSOVA TANYA,
NIKOLSKORZHEVSKYY ALEX,
PAPELL DAVID H.
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00384.x
Subject(s) - predictability , taylor rule , economics , inflation (cosmology) , output gap , exchange rate , econometrics , quarter (canadian coin) , liberian dollar , us dollar , unemployment , real interest rate , sample (material) , interest rate , monetary policy , monetary economics , macroeconomics , central bank , finance , statistics , mathematics , physics , chemistry , archaeology , chromatography , theoretical physics , history
This article uses real‐time data to show that inflation and either the output gap or unemployment, variables which normally enter central banks’ Taylor rules, can provide evidence of out‐of‐sample predictability for the U.S. dollar/euro exchange rate from 1999 to 2007. The strongest evidence is found for specifications that constrain the coefficients on inflation and real economic activity to be the same for the United States and the Euro Area, do not incorporate interest rate smoothing, and do not include the real exchange rate in the forecasting regression. Evidence of predictability is found with both one‐quarter‐ahead and longer‐horizon forecasts.