FORECASTING REAL EFFECTIVE EXCHANGE RATES FOR JAPAN USING FOR THE YEARS 2008-2019 USING ARIMA MODELS

VESEL USAJ*

TATJANA SPASESKA**

*PhD student at “St. Clement Ohridski” University in Finance department

**Professor Assistant at “St. Clement Ohridski” University

ABSTRACT

Real effective exchange rate is the nominal effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs. Forecasting of (macro)economics variables is an important part of economics analysis. ARIMA models provide forecasts of these variables by taking information from the past values to predict their future behavior. The time series models are based on the assumption that the time series involved are (weakly) stationary, the mean and variance for a weakly stationary time series are constant and its covariance is time-invariant.

The aim of this paper is to make a forecast of REER for Japan yen, taking for base the historical data of the 2008.01-2019.03. Following the steps of identification, estimation, diagnostics we successfully have forecasted the REER for Japan yen. In the first step the ARIMA(1,1,1) was identified as the best model for forecast, but after diagnostics results suggested that the AR(1)MA(1)MA(2) fits better for the forecast. The REER increases and decreases within the months and the chosen model is a good model that has predicted very close these movements.

Keywords: REER, ARIMA, forecast

  1. Introduction

In a world where there are many national and regional currencies, exchange rates define the rate or ratio of which one of these currencies can be exchanged for any other at any given point in time (Ewans 2014). It is possible to talk about two kinds of exchange rates, real exchange rates and nominal exchange rates. The real exchange rate (RER) is defined as the relative national price levels between two economies with the corresponding nominal exchange rate being an auxiliary to convert the unit of account such that two price levels are measured in a  single  currency.

Volume 6.No.2(2022): April – (Social Sciences Session)

ISSN 2661-2666 (Online) International Scientific Journal Monte (ISJM)
ISSN 2661-264X (Print)

DOI : 10.33807/monte.20222584

DOI URL: https://doi.org/10.33807/monte.20222584

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This is an open access article under the CC BY-NC-ND license (creativecommons.org/licenses/by-nc-nd/4.0/)