Making forecasts of the krona exchange rate
Economic Commentaries, News The best method for predicting the krona exchange rate depends on the forecast horizon. Up to one year ahead, the best forecast for the krona exchange rate is its level at forecast date. At longer horizons, the best forecast is based on the assumption that the krona will adjust towards a long-run equilibrium level. This is the conclusion reached by Riksbank’s employees Emil Askestad, Ana Maria Ceh, Paola Di Casola and Annukka Ristiniemi in a new economic commentary.
Since 1993, Sweden has had a floating exchange rate and an inflation target of 2 per cent. Sweden is a small open economy with extensive trade with the rest of the world. The krona exchange rate has an impact on the real economy and inflation, and therefore it is important for the Riksbank to have a well-informed view of the future development of the exchange rate. However, compared to other macroeconomic variables, the exchange rate is difficult to forecast.
In their economic commentary “Forecasting the krona”, the authors argue that the performance of different methodologies for forecasting the krona exchange rate depends on many factors, such as the forecast horizon and the sample period used for the analysis. They conclude that, in the short term, the best forecast for the exchange rate is its current level. In the medium term, the best forecast is based on the assumption that the krona, over time, will converge towards a long-run equilibrium level.
By Emil Askestad, Ana Maria Ceh, Paola Di Casola and Annukka Ristiniemi