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IR19-018_Fuertes+Sosvilla.pdf (921.34 KB)

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Working paper

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2019

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cc-by-nc-nd, (c) Fuertes Mendoza et al., 2019
Please use this identifier to cite or link to this item: https://hdl.handle.net/2445/145047

Forecasting emerging market currencies: Are inflation expectations useful?

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Abstract

This paper investigates the empirical relevance of inflation expectations in forecasting exchange rates. To that end, we use an expectation version of purchasing power parity (EVRPPP) based on the differential of inflation expectations derived from inflation-indexed bonds for Brazil, Colombia, Chile, India, Mexico, Poland, South Africa, South Korea and Turkey. Using monthly data on exchange rates and on the inflation expectations, we find that our predictors are not significantly better than the random walk model, although, with the exception of the South Korean Won, they outperform the random walk when considering the sign of the rate of change. We also find strongly support Granger causality running from exchange rate to the forecasts based on EVRPPP and only partial evidence of Granger causality running the other way around. Finally, our results suggest that 1-year, 5-year and 10-year inflation expectations are mutually consistent.

Subject

Inflació, Poder adquisitiu, Previsió econòmica, Canvi exterior

Subject (English)

Inflation (Finance), Purchasing power, Economic forecasting, Foreign exchange

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Documents de treball (Institut de Recerca en Economia Aplicada Regional i Pública (IREA))

Citation

FUERTES MENDOZA, Alberto and SOSVILLA RIVERO, Simón. Forecasting emerging market currencies: Are inflation expectations useful?. IREA – Working Papers. 2019. Vol.  IR19/18. [consulted: 15 of August of 2026]. Available at: https://hdl.handle.net/2445/145047

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