Title: Analysis of the CZK/USD exchange rate: a comparison of four major models

Authors: Yu Hsing, Bruno S. Sergi

Addresses: Department of Business Administration, College of Business, Southeastern Louisiana University, Hammond, LA 70402, USA. ' Faculty of Political Science, University of Messina, DESMaS 'V. Pareto', Via T. Cannizzaro, 278, 98122 Messina, Italy

Abstract: This paper studies the behaviour of the CZK/USD exchange rate based on four major models. Using the Mean Absolute Percent Error (MAPE) as a criterion, the IS-MP model performs best, followed by the monetary model, the Purchasing Power Parity (PPP) model using the relative Producer Price Index (PPI), the PPP model using the relative Consumer Price Index (CPI), and the Uncovered Interest Parity (UIP) model. The widely used log–log form in the PPP model with the relative PPI can be rejected at the 5% level over the period 1993.Q1–2008.Q2. The insignificant coefficient or incorrect sign in each of the models may pose some challenges to policymakers when these models are applied.

Keywords: Czech economy; PPP; purchasing power parity; UIP; uncovered interest parity; IS-MP model; monetary policy function; Czech Republic; USA; United States; exchange rates.

DOI: 10.1504/IJMEF.2009.024833

International Journal of Monetary Economics and Finance, 2009 Vol.2 No.2, pp.91 - 102

Published online: 01 May 2009 *

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