Knowledge that Transforms

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The main goal of this article is to provide an answer to the question: does anything forecast exchange rates, and if so, which variables? It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up-to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: “Are exchange rates predictable?” is, “It depends”—on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift. (JEL C53, F31, F37, E43, E52)

Jason F. Shogren of University of Wyoming reviews, “Behavioural Economics and Finance” by Michelle Baddeley. The Econlit abstract of this book begins: “Explores key concepts and insights from behavioral economics and its interdisciplinary approach to real-world decision making. Discusses foundations—psychology; foundations—neuroscience and neuroeconomics; learning; sociality and identity; heuristics and biases; prospects and regrets; personality, moods, and emotions; time and plans; bad habits; financial instability; and behavioral macroeconomics, happiness, and well-being. Baddeley is Fellow and Director of Studies (Economics) at Gonville and Caius College, Cambridge University.”

Rakesh V. Vohra of University of Pennsylvania reviews, “Jane Austen, Game Theorist” by Michael Suk-Young Chwe. The Econlit abstract of this book begins: “Explores the ways in which the core ideas of game theory appear in Jane Austen's novels. Discusses the argument; game theory in context; folk tales and human rights; game theory in Flossie and the Fox; Austen's six novels; Austen's foundations of game theory; Austen's competing models; Austen on what strategic thinking is not; Austen's innovations; Austen on strategic thinking's disadvantages; Austen's intentions; Austen on cluelessness; and real-world cluelessness. Chwe is Associate Professor of Political Science at the University of California, Los Angeles.”

Dora L. Costa of University of California, Los Angeles reviews, “Explaining Long-Term Trends in Health and Longevity” by Robert W. Fogel. The Econlit abstract of this book begins: “Explores the theory and measurement of aging- and health-related variables and considers how the anthropometric approach to historical analysis has helped reinterpret the nature of economic growth. Discusses secular changes in American and British stature and nutrition; second thoughts on the European escape from hunger—famines, chronic malnutrition, and mortality rates; trends in physiological capital—implications for equity in health care; changes in disparities and chronic diseases through the course of the twentieth century; and some common problems in analysis and measurement. Fogel is Charles R. Walgreen Distinguished Service Professor of American Institutions in the Booth School of Business at the University of Chicago.”

Rodney Wilson of Emeritus Professor, Durham University reviews, “Islamic Finance in Europe: Towards a Plural Financial System” by Valentino Cattelan. The Econlit abstract of this book begins: “Fifteen papers investigate Islamic finance in Europe as part of a plural financial system in the current age of globalization, through a multi- and interdisciplinary approach to law and economics. Papers discuss law as a kite—managing legal pluralism in the context of Islamic finance; a glimpse through the veil of Maya—Islamic finance and its truths on property rights; Islamic moral economy as the foundation of Islamic finance; financial stability and economic development—an Islamic perspective; Islamic banking contracts and the risk profile of Islamic banks; the economic impact of Islamic finance and the European Union; migrant banking in Europe—approaches, meanings, and perspectives; women's empowerment and Islam—open issues from the Arab world to Europe; Islamic banking in the EU legal framework; regulating Islamic financial institutions in the United Kingdom; Luxembourg—a leading domicile for Shari'ah compliant investments; managing Islamic finance vis-à-vis laïcité—the case of France; a critical view on Islamic finance in Germany; the development of Islamic banking in Turkey—regulation, performance, and political economy; and the move toward a plural financial system. Cattelan is Lecturer in Islamic Finance at the University of Rome ““Tor Vergata.””

Swati Dhingra of London School of Economics and Political Science reviews, “Reforms and Economic Transformation in India” edited by Jagdish Bhagwati and Arvind Panagariya. The Econlit abstract of this book begins: “Nine papers explore economic policy reforms in India and consider why their impact has not been as significant as it has been in other reform-oriented economies. Papers discuss labor regulations and firm size distribution in Indian manufacturing; complementarity between formal and informal manufacturing in India—the role of policies and institutions; services growth in India—a look inside the black box; organized retailing in India—issues and outlook; selling the family silver to pay the grocer's bill?—the case of privatization in India; variety in, variety out—imported input and product scope expansion in India; reforms and the competitive environment; the postreform narrowing of inequality across castes—evidence from the states; and entrepreneurship in services and the socially disadvantaged in India. Bhagwati is University Professor of Economics and Law at Columbia University. Panagariya is Professor of Economics and Jagdish Bhagwati Professor of Indian Political Economy at Columbia University.”