Real exchange-rate prediction over long horizons

In studying monthly real exchange rates between the US and Britain, Canada, Germany, and Japan from 1961 to 1993, we find that the deviation of the log real exchange rate from its time-varying, long-run equilibrium value contains a statistically significant predictable component at the four-year horizon over a forecast period extending from 1985 to 1993. Fixed-effects regressions employing differentials in productivity, real interest rates, and per capita income display some predictive power but fundamentals based on simple monetary models are generally more accurate and significant. (C) 1997 Elsevier Science B.V.