Survey results

As in Meese-Rogo (1983a), we implement rolling regressions to produce the out-of-sample forecasts underlying the MSE ratios in Figure 7. The forecasts are based on the following regression:

s_t= f_t⁰a+ u_t

where a is the vector of constant parameters to be estimated and = (1 L), where L is the lag operator. The size of the estimation sample is L and the forecasting sample size is P , hence the regression is rolled forward P times. The M SE^m is given by

M SE^m = 1 P

L+PX1 t=L

s_t+1 f_t+1⁰ ab ² (55) where a_b is estimated by OLS over the interval t + 1 L to t. Realized values of ft+1 are used to compute the forecast of s_t+1.

We compute a similar measure M SE^rw for the same forecasting sample, as-suming the exchange rate follows a random walk, i.e. setting a_b = 0 in the above equation. M SE^m is divided by M SE^rw to obtain the ratio of MSE displayed in Figure 7. We set P = 200 and vary L from 40 to 196. We compute the MSE ratios and take the simple average over the ve countries mentioned in Figure 7.

The exchange rate, st, is the bilateral US Dollar end-of-period rate from IFS.

The vector f_t⁰ is made of a constant and the following 5 variables:

Money supply: (m_t m^{U S}_t ), where m_t = ln M_tand M_tis M1, OECD Main Economic Indicators (MEI), for Canada and M1, IFS line 59MA, for Japan.

In the case of Germany/Euro area, we consider M1 seasonally adjusted, IFS line 59MACZF until December 1998 and M1, OECD MEI, for the Euro Area from January 1999. For the United Kingdom, we take M0, IFS line 19MC.ZF, until April 2006 (last observation of the IFS series) and M1, OECD MEI, from May 2006. For Switzerland, we consider IFS line 34ZF. Finally, for the United States, we take the corresponding series, i.e. either M1, IFS line 59MA or M1, OECD MEI. All seasonally unadjusted series were adjusted using monthly dummies.

Industrial production: (y_t y_t^{U S}), where y_t= ln Y_t and Y_t is the indus-trial production index, taken from IFS, line 66CZF, except for Switzerland for which no monthly series is available. For this country, we compute monthly observations from quarterly data (IFS, line 66) using the same procedure as in Molodstova and Papell (2009).

Unemployment rate: (u_t u^{U S}_t ), where u_t = ln U_t and U_t is the unem-ployment rate from OECD MEI except for Germany / Euro area. For this

country, we take a series from Datastream (Mnemonic WGUN%TOTQ) that covers only West Germany and is thus una ected by the German reuni ca-tion that took place in 1990.

Interest rate: i_{t 1} i^{U S}_{t 1}, where i_t is the monthly return calculated from the money market rate, IFS line 60B.

Oil price: p^oil_t , where p^oil_t = ln P_t^oiland P_t^oil is the average crude oil spot price from IFS.

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