Forecasting Exchange Rate Movements

The Difficult to forecast Exchange Rate Movements

Why is it apparently so difficult to forecast exchange rate movements? Discuss with reference to the monetary model, the Mundell-Fleming model and/or the Dornbusch model and its extensions

Introduction

The strength of currency values play a critical role when it comes to economic growth and fiscal stability. In most cases, fluctuations in exchange rates are largely seen as detrimental. This is mainly because the swings evident in exchange rates have imperative and huge bearings on the trade balance, resource apportioning, domestic prices, interest rate, national revenue and other fundamental economic factors. The overview points to whether these variables can help predict variations in the exchange rate. Some models for predicting such movements enable organizations, investors among others to effectively make good decisions. Regrettably, it’s challenging to forecast exchange rates particularly…..