INTEGRATION, COINTEGRATION AND THE FORECAST CONSISTENCY OF STRUCTURALEXCHANGE-RATE MODELS

We propose an alternative set of criteria for evaluating forecast rati onality: the forecast and the actual series (1) have the same order of integration, (2) are cointegrated and (3) have a cointegrating vector consistent with long-run unitary elasticity of expectations. We denot e forecasts that meet these criteria as 'consistent'. Forecasts genera ted from monetary models generally pass (1). However, using the Johans en procedure, cointegration fails to hold the longer the horizon. Of t he cointegrated pairs, (3) is not generally rejected. Using the Horvat h-Watson procedure, imposing the unitary coefficient restriction, we f ind fewer instances of consistency, although a higher proportion of th e cases of consistency are found at the longer horizons. (C) 1998 Else vier Science Ltd. All rights reserved. JEL classifications: F31, C50.