nep-for New Economics Papers
on Forecasting
Issue of 2007‒05‒04
two papers chosen by
Rob J Hyndman
Monash University

  1. Testing the Transparency Benefits of Inflation Targeting: Evidence from Private Sector Forecasts By Christopher W. Crowe
  2. Exchange rate forecasting, order flow and macroeconomic information By Dagfinn Rime; Lucio Sarno; Elvira Sojli

  1. By: Christopher W. Crowe
    Abstract: I test whether inflation targeting (IT) enhances transparency using inflation forecast data for 11 IT adoption countries. IT adoption promotes convergence in forecast errors, suggesting that it enhances transparency. This effect is robust to dropping observations, is strengthened by using instrumental variable estimation to eliminate mean-reversion, and is absent in placebo regressions (where IT adoption is shifted by a year). This result supports Morris and Shin's (2002) contention that better public information is most beneficial for forecasters with bad private information. However, it does not support their hypothesis that better public information could make private forecasts less accurate.
    Keywords: Inflation targeting , inflation forecasts , Central Bank transparency , propensity score matching , Inflation targeting , Inflation , Economic forecasting , Central banks , Transparency , Private sector , Forecasting models , Economic models ,
    Date: 2007–01–08
  2. By: Dagfinn Rime (Norges Bank (Central Bank of Norway)); Lucio Sarno (Universty of Warwick and CEPR); Elvira Sojli (Universty of Warwick)
    Abstract: This paper investigates the empirical relation between order flow and macroeconomic information in the foreign exchange market, and the ability of microstructure models based on order flow to outperform a naive random walk benchmark. If order flow reflects heterogeneous beliefs about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data for three major exchange rates, we demonstrate that order flow is intimately related to a broad set of current and expected macroeconomic fundamentals. More importantly, we find that order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise. The Sharpe ratio obtained from allocating funds using forecasts generated by an order flow model is generally above unity and substantially higher than the Sharpe ratios obtained from alternative models, including the random walk model.
    Keywords: Exchange rate, Microstructure, Order flow, Forecasting, Macroeconomic news.
    JEL: F31 F41 G10
    Date: 2007–04–20

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