Recent Articles

Read more about our latest published articles.

Review’s Archive

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

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


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.

Read the full article

Download the article in PDF format to read and print.


Abhyankar, A., L. Sarno and G. Valente (2005), “Exchange Rates and Fundamentals: Evidence on the Economic Value of Predictability”, Journal of International Economics, 66(2), 325-348.

Aggarwal, R., B.M. Lucey and S.K. Mohanty (2009) , “The Forward Exchange Rate Bias Puzzle is Persistent: Evidence from Stochastic and Nonparametric Cointegration Tests”, Financial Review, 44(4), 625-645.

Aggarwal, R. and S. Zong (2008), “Behavioral Biases in Forward Rates as Forecasts of Future Exchange Rates: Evidence of Systematic Pessimism and Under-Reaction”, Multinational Finance Journal, 12(3-4), 241-277.

Bacchetta, P. and E. van Wincoop (2006), “Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?”, American Economic Review, 96(3), 552-576.

Brown, B.W. (2010), Econometrics, <>.

Dritsaki, C. (2019) “Modeling the Volatility of Exchange Rate Currency using GARCH Model”, Economia Internazionale/International Economics, 72(2), 209-230.

Engel, C., N. Mark and K. West (2007), “Exchange Rate Models are Not as Bad as You Think”, NBER Macroeconomics Annual, 22, 381-441.

Evans, M. and R. Lyons (2005), “Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting”, American Economic Review, 95(2), 405-414.

Fair, R. (2008), “Estimating Exchange Rate Equations Using Estimated Expectations”, Yale University ICF Working Paper No. 07-18.

Flood, R. and A. Rose (2008), “Why so Glum? The Meese-Rogoff Methodology Meets the Stock Market”, CEPR Discussion Papers No. 6714.

Frankel, J.A. (2011), “Over-optimism in Forecasts by Official Budget Agencies and its Implications”, NBER Working Papers No. 17239.

Frankel, J. and A. Rose (1995), Empirical Research on Nominal Exchange Rates, in: G.M. Grossman, K. Rogoff (Eds), “Handbook of International Economics”, vol. 3, 1689-1729, Elsevier:  Amsterdam.

Kling, A. (2010), “Macroeconometrics: The Lost History”, Unpublished Paper, <>.

Kling, A. (2011), “Macroeconometrics: The Science of Hubris”, Critical Review, 23(1-2), 123-133.

Lavoie, M. (2000), “A Post Keynesian View of Interest Parity Theorems”, Journal of Post Keynesian Economics, 23(1), 163-179.

Loungani, P. (2001), “How Accurate Are Private Sector Forecasts: Cross-Country Evidence from Consensus Forecasts of Output Growth”, International Journal of Forecasting, 17(3), 419-432.

McAfee, A. and E. Brynjolfsson (2017), Machine, Platform, Crowd: Harnessing Our Digital Future, Norton: New York.

Meese, R. and K. Rogoff (1983), “Empirical Exchange Rate Models of the Seventies: Do They Fit Out-of-sample?”, Journal of International Economics, 14(1-2), 3-24.

Moosa, I.A. (2014), “Direction Accuracy, Forecasting Error and the Profitability of Currency Trading: Simulation-Based Evidence”, Economia Internazionale/International Economics, 67(3), 413-423.

Moosa, I.A. (2017), Econometrics as a Con Art: Exposing the Limitations and Abuses of Econometrics, Edward Elgar: Cheltenham.

Moosa, I.A. (2020), Controversies in Economics and Finance: Puzzles and Myths, Edward Elgar: Cheltenham.

Moosa, I.A. and K. Burns (2015), Demystifying the Meese-Rogoff Puzzle, Palgrave:  London.

Moosa, I.A. and M. Ma (2018), “Linear and Nonlinear Attractors in Purchasing Power Parity”, Economia Internazionale/International Economics, 71(2), 149-172.

Moosa, I.A. and J. Vaz (2016), “Cointegration, Error Correction and Exchange Rate Forecasting”, Journal of International Financial Markets, Institutions and Money, 44, 21-34.

Moosa, I.A. and J. Vaz (2018), “Direct and Indirect Forecasting of Cross Exchange Rates”, Economia Internazionale/International Economics, 71(2), 173-190.

Moreira, M.B. (2018), Understanding Financialization and its Impacts on Social Economy, in: P. Bance, CIRIEC (Eds), “Providing Public Goods and Commons: Towards Coproduction and New Forms of Governance for a Revival of Public Action”, Vol. 1 Ch. 6, 113-133, CIRIEC: Liège.

Neely, C. and L. Sarno (2002), “How Well Do Monetary Fundamentals Forecast Exchange Rates”, Federal Reserve Bank of St. Louis Review, September/October, 51-74.

Oliver, S. (2017), “The Perils of Forecasting and the Need for a Disciplined Investment Process”, Oliver Insight, 31 May.

Pesaran, B. and M.H. Pesaran (2009), Time Series Econometrics: Using Microfit 5.0, Oxford University Press: Oxford.

Pohlman, A. and O. Reynolds (2020), “Why Economic Forecasting is So Difficult in the Pandemic”, Harvard Business Review, May 18, <>.

Schinasi, G.J. and Swamy, P.A. (1989), “The Out-of-Sample Forecasting Performance of Exchange Rate Models when Coefficients are Allowed to Change”, Journal of International Money and Finance, 8(3), 375-390.

Smil, V. (2000), “Perils of Long-Range Energy Forecasting: Reflections on Looking far ahead”, Technological Forecasting and Social Change, 65(3), 251-264.

Smith, D.B. and W. Aaronson (2003), “The Perils of Healthcare Workforce Forecasting: A Case Study of the Philadelphia Metropolitan Area”, Journal of Healthcare Management, 48(2), 99-110.

Taylor, M.P. (1995), “The Economics of Exchange Rates”, Journal of Economic Literature, 33(1), 13-47.

Turner, D.S. (1990), “The Role of Judgement in Macroeconomic Forecasting”, Journal of Forecasting, 9(4), 315-345.

Wallis, K.F. and J.D. Whitley (1991), “Sources of Error in Forecasts and Expectations: UK Economic Models, 1984-1988”, Journal of Forecasting, 10(3), 231-253.

Weber, T. (2011), Davos 2011: Why do economists get it so wrong?, BBC News, 27 January.

Whitmore, B. (2008), The perils and Pitfalls of Oil Price Forecasting, RadioFreeEurope, 17 December, < Forecasting/1360914.html>.

Register your account

First-time users should click on “Register your account” and enter the requested information. Upon successful registration, you will receive an e-mail with instructions to verify your registration.

Submission Guidelines

Authors’ login

Use the assigned user ID and password to login. Please, do not register again. Usernames and passwords may be changed after.

Quick search by author:
Back to the top

Institute for International Economics
of the Genoa Chamber of Commerce

Istituto di Economia Internazionale
Camera di Commercio di Genova
Via Garibaldi, 4 (III piano) - 16124 Genova (Italy)