Analysis of the Behavior of the RON/USD Exchange Rate: A Comparison of Major Models
Analysis of the Behavior of the RON/USD Exchange Rate: A Comparison of Major Models

Summary/Abstract: This paper studies the behavior of the Romanian leu/U.S. dollar exchange rate. Based on the mean absolute percent error (MAPE), the UIP model performs best, followed by the extended IS-LM model, the Frankel model, the Bilson model, the PPP model using the relative CPI, the PPP model using the relative CPI, and the Frenkel model. The generalized Box-Cox model suggests that the widely used log-log form in the PPP model using the relative CPI or PPI can be rejected at the 1% level. The insignificant coefficient of the relative expected inflation rate in the Frankel model and the expected inflation rate in the IS-LM model, the incorrect sign of real M2 money in the extended IS-LM model, and the relatively large MAPEs in the PPP and monetary models suggest that caution would be needed when they are applied.

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