Research Discussion Paper – RDP 8612 A Weekly Model of the Floating Australian Dollar


In the first two years of its float, the Australian-U.S. dollar exchange rate has substantially depreciated and oscillated. This paper tests to see whether this exchange rate has, at least, followed a random walk with drift. Having established this benchmark, structural monetary models are constructed to see whether one can obtain better within-sample and/or out-of-sample results. Rational forecasts of exogenous variables are obtained using Muth's (1961) decomposition; interpolation is used to obtain weekly forecasts when the observation period is greater. It appears that the random walk can be beaten.

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