Forecasting Foreign Exchange Rate Assuming PPP Conditions : Empirical Evidence Using VAR

In this paper we evaluate a set of Colombian exchange rate forecasts during 1995-2005, using a Purchasing Power of Parity Exchange Rate Model (PPPER). Our first finding is that the computed forecasts seem to validate the use of this model under certain conditions given that, theoretically, it does a good work in predicting the long-term behavior of the nominal exchange rate. Our second finding included a comparative analysis of out-of-sample forecasts (saving the 2001-2005 historical data) between the PPP-based forecast models, and the Vector Autoregresive (VAR) ones. The VAR method has a better forecasting performance, according to the RMSE, MAE and U-Theil measures