Exchange Rate Models, Long Run Equilibrium, Dynamics and Hysteresis

Forecasting exchange rates remains a tricky issue for economists. In spite of a theoretical consistent framework, macroeconomic models fail to beat random walk models and market expectations doesn't have any predictive power. This article addresses some problems of exchange rate macroeconomic modelling. The first part discusses long run equilibrium exchange rate theories (FEER, BEER, NATREX). The second part presents a small macroeconomic model of exchange rate dynamics; it considers several modelling alternatives - monetary policy specification, prices-wages loop, portfolio and patrimonial effects - and analyzes their impacts on long run and dynamic properties. The third part introduces explicitly fiscal policy specifications. The last part gives an example of a model with hysteresis, where temporary shocks influence the long run equilibrium exchange rate