Can Taylor rule fundamentals predict the usd/nok exchange rate?

Abstract

The objective of this paper is to offer new insight to the exchange rate literature by examining the predictability of the USD/NOK exchange rate. Using Taylor rule fundamentals as a predictor, we examine exchange rate predictability in the period from August 2001 to February 2015. We construct 32 models on the basis of Taylor rule, and compare their forecasting ability with the random walk. Our results suggest that an asymmetric model with interest rate smoothing, heterogeneous coefficients and a constant outperforms the random walk.