Foreign Currency Prognostication: Diverse Tests for Germany

Abstract

This paper uses a large variety of different models and examines the predictive performance of these exchange rate models by applying parametric and non-parametric techniques. For forecasting, we will choose that predictor with the smallest root mean square forecast error (RMSE). The results show that the better models are in equations (3), (10), (17), and (18), although none gives a perfect forecast. At the end, error correction versions of the models will be fit so that plausible long-run elasticities can be imposed on the fundamental variables of each model.