Equilibrium models of exchange rates

Most of the large industrialized countries floated their exchange rates in early 1973, after the demise of the post-war Bretton Woods system of fixed exchange rates. While there have been extensive academic disputes over the relative merits of fixed and floating exchange rates, most discussions have been carried out on a largely hypothetical basis. The move to a generalized floating regime provided economists with the empirical data set required to resolve such academic disputes. Successes in this arena have been few. The most damaging result was produced by Meese and Rogoff (1983), who compared the predictive abilities of various models of exchange rate models. Their key finding was that no existing structural model could reliably outpredict the naive alternative of a random walk footnote at short and medium horizons. This extreme negative finding has never been convincingly overturned despite numerous attempts. The most important regularities remain what they were 15 years ago. footnote