Empirical exchange rate models of the nineties: Are any fit to survive?

We re-assess exchange rate prediction using a wider set of models that have been proposed in the last decade: interest rate parity, productivity based models, and a composite specification. The performance of these models is compared against two reference specifications - purchasing power parity and the sticky-price monetary model. The models are estimated in first-difference and error correction specifications, and model performance evaluated at forecast horizons of 1, 4 and 20 quarters, using the mean squared error, direction of change metrics, and the “consistency” test of Cheung and Chinn [1998. Integration, cointegration, and the forecast consistency of structural exchange rate models. Journal of International Money and Finance 17, 813-830]. Overall, model/specification/currency combinations that work well in one period do not necessarily work well in another period.