A New Approach to Forecasting Exchange Rates

Building on purchasing power parity theory, this paper proposes a new approach to forecasting exchange rates using the Big Mac data from The Economist magazine. Our approach is attractive in three aspects. Firstly, it uses easily-available Big Mac prices as input. These prices avoid several serious problems associated with broad price indexes, such as the CPI, that are used in conventional PPP studies. Secondly, this approach provides real-time exchange-rate forecasts at any forecast horizon. Such real-time forecasts can be made on a day-to-day basis if required, so that the forecasts are based on the most up-to-date information set. These high-frequency forecasts could be particularly appealing to decision makers who want up-to-date forecasts of exchange rates. Finally, as our forecasts are obtained through Monte Carlo simulation, estimation uncertainty is made explicit in our framework which provides the entire distribution of exchange rates, not just a single point estimate. A comparison of our forecasts with the random walk model shows that although the random walk is superior for very short horizons, our approach tends to dominate over the medium to longer term.Exchange-rate forecasting, Bic Mac prices, purchasing power parity, Monte Carlo simulation

How Long is the Long Run? Evidence from the Foreign Exchange Market

The aim of this paper is to estimate the length of the long run in the foreign exchange market. We do this by examining the link between exchange rates and relative prices, based on the implications of purchasing power parity (PPP) theory. Using a new approach, we test if the ratios of variances of exchange rates to prices are unity over all horizons, as implied by PPP. Through Monte Carlo simulations, we derive the variance ratios under the null of equal variances and examine the power and size of the test. We find evidence that PPP holds in the long run. While the long run based on the consumer prices appears to be “long”, about five years, the estimate of the long run based on the single good, Big Macs, is shorter (two years).

Collinear antiferromagnetic state in a two-dimensional Hubbard model at half filling

In a half-filled Hubbard model on a square lattice, the next-nearest-neighbor hopping causes spin frustration, and the collinear antiferromagnetic (CAF) state appears as the ground state with suitable parameters. We find that there is a metal-insulator transition in the CAF state at a critical on-site repulsion. When the repulsion is small, the CAF state is metallic, and a van Hove singularity can be close to the Fermi surface, resulting in either a kink or a discontinuity in the magnetic moment. When the on-site repulsion is large, the CAF state is a Mott insulator. A first-order transition from the CAF phase to the antiferromagnetic phase and a second-order phase transition from the CAF phase to the paramagnetic phase are obtained in the phase diagram at zero temperature.Comment: 5 pages, 5 figures, two column

A Stochastic Measure of International Competitiveness

Government agencies around the world produce indexes that purport to measure international competitiveness. The most common version is the real effective exchange rate, which is some form of weighted average of the real exchange rates of the country’s trading partners. Such indexes convey a false sense of accuracy as they ignore the volatility among the component real exchange rates of the partners. As long as all real rates do not move in an equiproportionate fashion, in a fundamental sense real effective exchange rates are subject to estimation uncertainty. We demonstrate show how this uncertainty can be measured and used to enhance current practice.

Two Short Papers on Marijuana, Legalisation and Drinking: (1) Exogeneous Shocks and Related Goods: Drinking and the Legalisation of Marijuana; and (2) Notes on Projections of Alcohol Consumption Following Marijuana Legalisation

(1) The paper uses the substitutability between goods to model the transmission to other products of a consumption shock to one product. The framework is used to analyse the impact on drinking of legalisation of marijuana. For all types of consumers for example, the results indicate that legalisation would led to approximately a 4-percent increase in marijuana consumption, while beer, wine and spirits consumption would fall by 1 percent, 2 percent and almost 4 percent, respectively. And; (2) Clements and Daryal (2005) develop a utility-maximising theory of how exogenous shocks to one market have implications for the consumption of related goods, and applied that theory to analyse the impacts on drinking of possible legalisation of marijuana. These notes set out the derivations of the standard errors of their projections.Legalisation, marijuana, alcohol

The Demand for Vice: Inter-Commodity Interactions with Uncertainty

This paper introduces a simulation procedure in the context of a demand system for vice -- marijuana, tobacco and alcohol -- to formally account for the inherent uncertainty in marijuanarelated data and parameters. This entails using existing econometric estimates pertaining to the consumption of alcohol and tobacco, and the much more limited information on marijuana. As an illustrative application of the framework, we simulate the impact on the consumption of vice of a reduction in the price of marijuana; changes in pre-existing taxes on tobacco and alcohol; legalisation of marijuana, which is then subject to taxation; and a tax tradeoff involving the introduction of a revenue-neutral tax on marijuana that is offset by reduced alcohol taxation. The revenue-maximising tax rate of about 50 percent is estimated to yield additional revenue of about 15 percent of the pre-existing proceeds from vice taxation. The role of uncertainty surrounding preference interactions within vice, as well as the uncertainties regarding marijuana data, is highlighted by providing the whole distribution of each endogenous variable.

Exchange-Rate Economics for the Resources Sector

The paper provides an account of aspects of exchange-rate economics that are of particular relevance to the resources sector. The issues discussed include exchange-rate volatility and risk management practices used to deal with it, the role of productivity differences across countries, the impact of a booming resources sector on the country’s exchange rate and approaches to forecasting exchange rates. The discussion is organised around a simple stylised model that emphasises the quantity theory of money and purchasing power parity as a long-run link between prices and exchange rates.