Empirical Analysis of Taylor Rule Exchange Rate Forecasting on Emerging Currencies

Abstract

This paper extends the Taylor rule exchange rate forecasting by applying it to an emerging market currency, South Korean won, to fill the gap of thin existing literature of the Taylor rule forecasting model on emerging economies. A country to country research has been taken to prevent the assumption of homogeneity of emerging markets monetary policies. In-sample and out-of-sample predictions have been taken with three models on a quarterly basis: the random walk, time-series autoregression model, and the Taylor rule fundamental model. To test the prediction accuracy Diebold-Mariano statistics have been incorporated.