Neoclassical versus Post Keynesian models of exchange rate determination: a comparison based on nonnested model selection tests and predictive accuracy

An attempt is made to evaluate the neoclassical and Post Keynesian approaches to exchange rate determination, represented respectively by the flexible price monetary model and a version of the flow model that takes into account market psychology, resulting in a bandwagon effect. For this purpose, nonnested model selection tests and measures of predictive accuracy are used to evaluate the two models. Based on monthly data covering four different exchange rates and the determining variables over the period 1990-2004, the results reveal the superiority of the Post Keynesian model.