19 Probability distribution of forecasts. Assume that the following regression model was applied to historical quarterly data:

where et ¼ percentage change in the exchange rate of the Japanese yen in period t

Also assume that the inflation differential in the most recent period was 3%. The real interest rate differential in the upcoming period is forecasted as follows:

If Stillwater Ltd uses this information to forecast the Japanese yen’s exchange rate, what will be the probability distribution of the yen’s percentage change over the upcoming period?

Transcribed Image Text:

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