Concluding Remarks

Abstract

The Meese-Rogoff puzzle should not be considered a puzzle, and exchange rate models should not be expected to outperform the random walk in terms of magnitude-only measures of forecasting accuracy. The superior performance of the random walk in terms of the RMSE and similar criteria should be expected because the forecasting error of the random walk is the period-to-period change in the exchange rate, which is typically small. The Meese and Rogoff findings cannot be overturned, but only in the narrow sense that exchange rate models cannot produce a numerically smaller and statistically different magnitude of error compared to the random walk. The only plausible explanation for the Meese-Rogoff puzzle is that forecasting accuracy is assessed exclusively by the magnitude of error.