Ruhr Economic Papers

Ruhr Economic Papers #637

The Impact of Uncertainty on Professional Exchange Rate Forecasts

by Joscha Beckmann and Robert Czudaj

RUB, UDE, 09/2016, 62 S./p., 8 Euro, ISBN 978-3-86788-741-0 DOI: 10.4419/86788741

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Abstract

This paper analyzes the role of uncertainty on both exchange rate expectations and forecast errors of professionals for four major currencies based on survey data provided by FX4casts. We consider economic policy, macroeconomic, and financial uncertainty as well as disagreement among CPI inflation forecasters to account for different dimensions of uncertainty. Based on a Bayesian VAR approach, we observe that effects on forecast errors of professionals turn out to be more significant compared to the adjustment of exchange rate expectations. Our findings are robust to different forecasting horizons and point to an unpredictable link between exchange rates and fundamentals. Furthermore, we illustrate the importance of considering common unpredictable components for a large number of variables. We also focus on the post-crisis period and the relationship between uncertainty and disagreement among exchange rate forecasters and identify a strong relationship between them.

JEL-Classification: F31, F37

Keywords: Bayesian VAR; exchange rates; expectations; forecast; uncertainty

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