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Corresponding Author:
Ebrahim Merza, Department of Economics, Kuwait University, Kuwait City, Kuwait

Coauthors:
Imad A. Moosa, Department of Economics, Kuwait University, Kuwait City, Kuwait

Pitfalls in Econometric Forecasting with Illustrations from Exchange Rate Economics

July 5, 2022
JEL classification: C10; C18; F31
Keywords: Forecasting; Meese-Rogoff Puzzle; Forward Rate; Dynamic Models; Cointegration

Abstract

Pitfalls in econometric forecasting are illustrated with reference to the ability of economists to forecast exchange rates, which is bound to bring about the Meese-Rogoff puzzle that exchange rate forecasting models cannot outperform the random walk in out-of-sample forecasting. Loopholes in forecasting include the use of dynamic models to generate forecasts, taking the forward rate to be a forecaster, and invoking the concept of cointegration to resolve the Meese-Rogoff puzzle. It is concluded that the flaws that can be detected easily in the forecasting literature provide a good enough reason for handling forecasts with care and that the way forward is to abandon the practice of producing allegedly precise point forecasts.

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Pitfalls in Econometric Forecasting with Illustrations from Exchange Rate Economics

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Institute for International Economics of the Genoa Chamber of Commerce

Institute for International Economics
of the Genoa Chamber of Commerce