Model Uncertainty of Real Exchange Rate Forecast over Mid-term Horizons

We investigate the significance of fundamentals variables and uncertainty of appropriate models in one-, two-, four-, and eight-quarter ahead forecasts of quarterly yen-dollar real exchange rates by using 16 fundamentals-based models and the random walk model. Our empirical results show significance of fundamentals variables in two-, four-, and eight-quarter ahead forecasts. Moreover, the reversible jump MCMC approach for uncertainty of appropriate models indicates that appropriate models change over both forecast-time-span and forecast period. This uncertainty could not be fully explained by the hypothesis that real exchange rates are ultimately governed by the true fundamentals-based model.