Does the explanatory power of the monetary prediction models change during times of financial crisis? A study of the Swedish krona.

Abstract: This study compares how the Swedish krona, valued in four different currencies, changes during times of financial crisis with non-crisis periods. Then out-of-sample predictions are made based on the flexible-price model. The predictions are made for the one period time horizon using the most recent information available at that time. This is done by re-estimating the parameters for every new observation that becomes available by using rolling regressions. These predictions are then compared to a benchmark based on no-change values. The results are mixed and even though the benchmark could not be beaten in this study, the evidence indicates that it is possible.