Analysis of the CZK/USD exchange rate: a comparison of four major models

This paper studies the behaviour of the CZK/USD exchange rate based on four major models. Using the Mean Absolute Percent Error (MAPE) as a criterion, the IS-MP model performs best, followed by the monetary model, the Purchasing Power Parity (PPP) model using the relative Producer Price Index (PPI), the PPP model using the relative Consumer Price Index (CPI), and the Uncovered Interest Parity (UIP) model. The widely used log–log form in the PPP model with the relative PPI can be rejected at the 5% level over the period 1993.Q1–2008.Q2. The insignificant coefficient or incorrect sign in each of the models may pose some challenges to policymakers when these models are applied.