Economic theory and exchange rate forecasts

Abstract

Businesses use forecasts of exchange rates to make decisions about production, employment, investment, financial management, and pricing decisions. The proper statistical criteria for making and evaluating these exchange rate forecasts are implied by the underlying decision problem. That decision problem is in turn affected by the economic environment facing the firm and its industry, the overall macroeconomic situation, and the main types of disturbances affecting exchange rates. In general, the proper loss function for the forecasting problem will be asymmetric.