Abstract
Simultaneous equation bias, which arises as a result of endogeneity of the explanatory variables, has been suggested as an explanation for the Meese-Rogoff puzzle. Endogeneity of macroeconomic variables may arise from the possibility of monetary policy feedback in the monetary model, which means that a model that incorporates endogeneity should produce better forecasts in terms of the magnitude of error. However, we find, with one exception, that the VAR models corresponding to the Frenkel-Bilson, Dornbusch-Frankel and Hooper-Morton static models do not produce significantly smaller RMSEs than that of the random walk.
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© 2015 Imad A. Moosa and Kelly Burns
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Moosa, I.A., Burns, K. (2015). Simultaneous Equation Bias. In: Demystifying the Meese-Rogoff Puzzle. Palgrave Pivot, London. https://doi.org/10.1057/9781137452481_8
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DOI: https://doi.org/10.1057/9781137452481_8
Publisher Name: Palgrave Pivot, London
Print ISBN: 978-1-349-49743-0
Online ISBN: 978-1-137-45248-1
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