International Macroeconomic and finance

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4. Meese and Rogoff's (1983) Exchange Rate Disconnect Puzzle (a) Using the reported results in Table 1, describe the work of Meese and Rogoff (1983) and define the exchange rate disconnect puzzle (25 marks) (b) Summarise how the literature on exchange rate modelling and forecasting developed in response to Meese and Rogoff (1983). In particular, enumerate what is known at present about the predictability or not of exchange rates (you should be able to list at least half a dozen conclusions - without the need to cite precise references). (25 marks) 28/08/2019 ECM136 2019/20 Exam Paper - Questions 4/5 Table 1: The Meese-Rogoff (1983) Forecasting Results Model: Random Forward Univariate VAR Monetary Dornbusch walk rate AR model model Ex. rate Horizon $/DM 3.72 3.20 3.51 5.40 3.17 3.65 8.17 9.03 12.40 11.83 9.64 12.03 19 12.98 12.60 22.53 15.06 16.12 18.87 S/yen 3.68 3.72 4.46 7.76 4.11 4.40 6 11.58 11.93 22.04 18.90 13.38 13.94 19 18.31 18.95 52.18 22.98 18.55 20.41 2.56 2.67 2.79 5.56 2.82 2.90 6 6.45 7.23 7.27 12.97 8.90 8.88 12 9.96 11.62 13.35 21.28 14.62 13.66 trade- 1.99 n.a. 2.72 4.10 2.40 2.50 weighted 6.09 n.a. 6.82 8.91 7.07 6.49 h $ NEER 8.65 4.2 11.14 10.96 1.40 9.80 Table 1 - Root Mean Squared Error (RMSE) of the Exchange Rate Models. Source: Meese and Rogoff (1983)