FORECASTING REAL EXCHANGE-RATES

Considerable evidence supports the view that real exchange rates do no t have unit roots but rather show mean reversion. This is the first pa per to present systematic results on if and how this mean reversion is useful for forecasting real rates. Longer time horizons improve the p erformance of the estimated forecast models relative to the benchmark driftless random walks. Longer estimation periods particularly improve performance relative to the benchmark. The forecasting ability in sim ple statistical models seems genuine, but the models resolve only a sm all part of the uncertainty regarding the revolution of real exchange rates. (C) 1998 Elsevier Science Ltd. All rights reserved.