ON FUNDAMENTALS AND EXCHANGE-RATES - A CASSELIAN PERSPECTIVE

Using an expanded version of the purchasing-power-parity condition we construct simultaneous equation models for three key exchange rates wh ich incorporate meaningful long-run equilibrium relationships and comp lex short-run dynamics. We show that fully dynamic out-of-sample forec asts from these models are capable of significantly outperforming thos e of a random walk model over horizons as short as 3 months, and that they are also more accurate than the vast majority of professional for ecasts.