Probability Distribution of Forecasts Assume that the following regression model was applied to historical quarterly data:
where: percentage change in the exchange rate of the Japanese yen in period
average real interest rate differential (U.S. interest rate minus Japanese interest rate) over period
INF inflation differential (U.S. inflation rate minus Japanese inflation rate) in the previous period regression coefficients error term
Assume that the regression coefficients were estimated as follows:
Also assume that the inflation differential in the most recent period was 3 percent. The real interest rate differential in the upcoming period is forecasted as follows:
If Stillwater, Inc., uses this information to forecast the Japanese yen’s exchange rate, what will be the probability distribution of the yen’s percentage change over the upcoming period?
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