When Are Pooled Panel‐Data Regression Forecasts of Exchange Rates More Accurate than the Time‐Series Regression Forecasts?

Abstract

This chapter analyzes the conditions under which pooled regression forecasts generate more accurate exchange rate predictions than time-series regressions when the available econometric theory says that you should not pool. It describes the methodology employed in the panel data exchange rate forecasting literature. The econometric theory that provides some guidance in seeing the consequences from pooling when there is underlying heterogeneity, is explained in the chapter. Some of the ideas and predictions from the econometric theory are illustrated through a Monte Carlo study. The mean-square prediction errors (MSPE) are computed from the pooled regression forecasts, the time-series regression forecast, and the driftless random walk forecast. Controlled Vocabulary Terms exchange rates; Monte Carlo; panel data exchange rate determination; pooled panel-data regression; time-series regression

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