This question examines your understanding on exchange rate determination models

and the statistical tools required to compare exchange rate forecasts. Answer all subquestions, from a$)$ to c$).$

a$)$ If the Real Interest Rate Parity $($RIP$)$ holds, what are the implications for

exchange rate forecasting? What would it be the best forecast for the exchange

rate under this scenario? As part of your answer briefly describe the RIP equation

and the implication for exchange rate forecasting. Explain how your answer

compares$/$contrasts to the Meese$-$Rogoff puzzle $($Meese & Rogoff, $1983)$

b$)$ Considering the findings in Meese & Rogoff $(1983),$ what is the rationale behind

modelling the exchange rate returns as a random walk? As part of your answer,

include the main implications in Engel & West $(2005).$

c$)$ Briefly describe the statistical process and the main tools we usually would use

in forecasting exchange rates.