Index Constructing, Prediction Performance, and Empirical Analysis of New Taiwan Dollar Real Effective Exchange Rate
Date Issued
2008
Date
2008
Author(s)
Tseng, Yi-Heng
Abstract
The purpose of this paper is to analyze the combinations of the two relevant technical choices, including the weights and currency baskets, for constructing Taiwan’s real effective exchange rate (REER) index. Using the VAR model and the re-sampling method of stationary bootstrap, we execute the out-of-sample forecasting procedures for all the 32 possible kinds of Taiwan’s REER indices mentioned above. Based on the empirical results of 95% confidence interval test of DM（Diebold and Mariano, 1995） statistics calculated from 5,000 sets of re-sampling data, our major findings and suggestions include: (1) as for the currency basket, we can use the “complete currency basket” of 18-country (the most important 18 countries in the bilateral trade of Taiwan); (2) as for the weights types, index constructor can decide whether combining the concept of the third-market exports weight to the traditional bilateral trade weight, according to his own cost-benefit analysis. Moreover, we conduct several empirical analysis, like re-examining Central Bank’s “dynamic stabilization” policy, stabilization policy for the economic fundamentals, and estimating the potential width of the allowed interval.
Subjects
Taiwan’s real effective exchange rate (REER) index
Currency baskets
Third-market export weights
VAR model
Out-of-sample forecasting
Stationary bootstrap
Type
thesis
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