MODELLING AND FORECASTING THE INDIAN REUS DOLLAR EXCHANGE.pdf

CDE February 2011 MODELLING AND FORECASTING THE INDIAN RE/US DOLLAR EXCHANGE RATE Pami Dua Email: dua@ Delhi School of Economics University of Delhi Rajiv Ranjan Reserve Bank of India Mumbai Working Paper No. 197 Centre for Development Economics Department of Economics, Delhi School of Economics Modelling and Forecasting the Indian Re/US Dollar Exchange Rate Pami Dua 1 Department of Economics, Delhi School of Economics University of Delhi, Delhi, India and Rajiv Ranjan Reserve Bank of India, Mumbai, India Abstract This paper develops vector autoregressive and Bayesian vector autoregressive models to forecast the Indian Re/US dollar exchange rate which is governed by a managed floating exchange rate regime. It considers extensions of the monetary model that include the forward premium, capital inflows, volatility of capital flows, order flows and central bank intervention. The study finds that the monetary model generally outperforms the naïve model. It also finds that forecast accuracy can be improved by extending the monetary model to include forward premium, volatility of capital inflows and order flow. Information on