Out-of-sample performance of Taylor rule fundamentals and traditional models : SEK/USD during the financial crisis

Abstract

This paper evaluates the ability of Taylor rule fundamentals and some traditional models over the period of the financial crisis. We use the Swedish Krona/U.S. Dollar exchange rate and quarterly data from 1993 to 2011, in order to compare the models’ forecasting performance. Starting the analysis from the beginning of the financial crisis, the models’ performance appears to be relatively inferior to the random walk. However, after the end of the Swedish recession, some positive results occur regarding Taylor rule models, which seem to outperform the interest rate differentials and other fundamental-based models against the random walk.